Not only has the catastrophe bond market continued to rebound from the financial turmoil of 2008, it's maturing to become more than just a tool for reinsurers.

The first half of 2010 continued the trend of strong returns for the insurance-linked securities sector after the financial crisis. New issuance for the first six months reached $2.5 billion, which is 40% higher than last year and 73% of the total issued in 2009, said Swiss Re in a report.

"Things have been really picking up," said Judy Klugman, managing director and head of industry-linked securities distribution for Swiss Re. "There's a significant amount of capital coming into the sector."

The second quarter alone saw eight new cat bonds come to the market with a total of $2.05 billion of risk capital, making it the second-most active second quarter on record, said GC Securities, a division of MMC Securities Corp., a U.S. registered broker-dealer.

"Having this level of activity in 2010 is pretty significant," said Chi Hum, managing director of GC Securities. "It's a stabilization of the issuance."

While the third quarter -- the height of U.S. hurricane season -- is typically a quiet time when few cat bonds come to market, experts said there are bonds involving non-U.S. wind risk in the pipeline.

"We are well on our way to surpass last year's issuance of $3.5 billion," Klugman said. "Hopefully, we'll get back to $5 billion, which would be the best year since 2007."

GC Securities estimates cat bond issuance could total $4 billion to $6 billion in 2010 (which includes an estimated $1.7 billion to $3.7 billion in new cat bonds for the second half of the year).

Ken Travers, senior vice president of catastrophe modeler Eqecat's consulting group, said he's seen an increase in clients asking for analytics to support industry-linked securities, including catastrophe bonds and industry loss warranties. Eqecat has analyzed 22 cat bond tranche issues for the first half of this year compared with 18 total for the entire 2009.

"That's another sign that the ILS market has rebounded," Travers said.

For the first half of the year, 85% of cat bonds issued have been related to U.S. wind risk, Klugman said.

"We haven't seen a lot of diversified perils come to market so far this year," she said. "We are confident that investors will see diversified perils coming out of the market later this year."

Klugman said she's hopeful that European wind risks among other types of risks will be transferred to the cat bond market later this year.

"There's huge interest from investors in diversifying risk," Hum said.

The launch of Perils AG, the Zurich-based provider of industrywide European catastrophe insurance data, has provided a new alternative for industry-linked securities deals based on European windstorm risk, Travers said.

In July, Perils estimated that more than $250 million in insurance risk transactions based on its industry loss index had been placed in the first six months of 2010 (BestWire, July 14, 2010).

Eqecat, which works with the insurance industry and investors in the insurance-linked securities arena, has seen an increased interest in transactions involving risks in South America and Asia as both investors and insurers seek to diversify their aggregate exposure, Travers said.

Also, he said Eqecat has recently seen increased client interest in product and consulting support for industry-loss warranties, private transactions in which protection is triggered based upon reported industry loss. "It's another way that reinsurers that have significant aggregate catastrophe exposure can hedge that risk," Travers said.

Another trend in the market is about 90% of the cat bond issuers in the second quarter were primary insurance companies. That points to "the maturity of the market," Hum said. "Cat bonds are starting to be integrated into the capacity purchase decision of primary insurance companies."

While reinsurers can decide to not write business if the pricing isn't right, primary companies cannot just pull out of a state if they can't find adequate reinsurance. Cat bonds offer an alternative to reinsurance that's attractive to primary writers for many different reasons.

Unlike traditional one-year reinsurance contracts, cat bonds can stretch out over three or more years, which allows companies to lock in their cat coverage for a longer period of time, shielding them from sudden rate hikes, Hum said.

Also, cat bonds offer fully collateralized coverage, meaning insurance companies mitigate the risk of how credit worthy a reinsurer is.

"Traditional reinsurance is a one-year contract that's not collateralized. You have the full counter-party risk," Hum said. "The guys who are going to pay you when you need the money the most are exposed to the same risk that triggers the payment."

But cat bonds are still an alternative risk transfer solution, not a replacement for reinsurance, Klugman said.

"While primary insurers truly value industry-linked securities as a complementary source of capacity, it's not meant to cannibalize the overall reinsurance program," Klugman said. "They still rely a lot on traditional reinsurance."

(By Meg Green, senior associate editor, BestWeek: Meg.Green@ambest.com)