Credit and surety bond markets bounce back but challenges remain

According to Guy Carpenter’s Credit, Bond and Political Risk Team: 2010 Market Update mid-year 2010 results of the leading credit insurers show strong improvements, as all key insurers in the class enacted core underwriting plans to turn around previous results.

The general success in avoiding severity losses underscored the sector’s primary challenge in a downturn but there is concern that subsequent easing of underwriting parameters could continue without adequate regard for the prevailing downside risk, Guy Carpenter explained.

Whilst profits of credit insurers fell during the peak of the downturn for the key mono-line insurers, bottom line results were not catastrophic, it added.

Overall, the surety sector continues to show significant growth potential, although reinsurers are concerned that the market has yet to experience the true extent of losses resulting from the economic downturn, according to the report.

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Growth potential exists in specific areas, as infrastructure projects remain a priority in many countries. Power facilities continue to be a major source of activity, and mining projects are slowly returning to the market. Governments may also provide a further short-term, limited impetus by creating work for the private sector.

However, the sector’s growth potential is balanced by challenges in the non-construction bond segment. Customs and other legal bonds continue to face the threat of reduced trade activity, potentially harming the financial status of importers and logistics companies.

The reinsurance community is generally concerned that bond insurers have not yet experienced a downturn due to the longer tenors of the underlying exposures, Guy Carp said. If reinsurers are correct, meaningful losses will continue in the sector, with pricing/structures likely to reflect this development into 2011, it warned.

“The global reinsurance sector is still highly important to the behaviour of the credit, bond and political risk sector. While there may be localised deterioration, the broader market likely will continue to perform well because of the remedial steps taken during the period of poor economic performance. We believe we are at the mid-point of a typical cycle and are entering a profitable period, and our outlook remains quietly optimistic,” said John Orchard, Global Head of Credit, Bond & Political Risk Specialty.

The report is available in full at www.gccapitalideas.com.