February 28th, 2008

The Catastrophe Bond Market at Year-End: The Market Goes Mainstream*

Posted at 1:19 PM ET

After a decade of use and refinement, catastrophe bonds (“cat bonds”) have matured substantially. They have become integrated into modern catastrophe risk management practices. Issuance activity rates accelerated dramatically, even in the wake of two consecutive annual new issuance records. With rates softening for traditional reinsurance capacity, a third consecutive record-setting year characterized the cat bond market in 2007.

This year was the most active in the history of the cat bond market, shattering all previous issuance records with USD7 billion[1] in publicly disclosed transactions, up 49 percent from last year’s record of USD4.7 billion and a 251 percent increase over the USD2 billion placed during 2005. Twenty-seven transactions were completed, also a new record, exceeding the 20 transactions that closed during 2006. This is nearly triple the 10 transactions placed during 2005. Allstate, Chubb, Travelers and State Farm were among a record number of first-time sponsors. These four sponsors alone sponsored cat bond limits of USD2 billion.

Cat bond risk capital outstanding was USD13.8 billion at year-end, a 63 percent increase over USD8.5 billion in 2006 and nearly three times the USD4.9 billion outstanding at the end of 2005. Cat bond risk principal now composes 8 percent of the estimated property limits globally and 12 percent on a U.S.-only basis.[2]

Since 1997, when the market began in earnest, 116 cat bonds have been issued, with total risk limits of USD22.3 billion. Of this total, 52 percent (USD11.7 billion) have been issued in the last two years alone. Further, the use of shelf offering programs accelerated throughout 2007. New shelf offerings, or takedowns from existing shelf offerings, accounted for 21 of 27 transactions and more than 70 percent of total risk capital issued.

Five indemnity-triggered transactions totaling USD2.3 billion were issued in 2007. Not including State Farm’s USD1.1 billion Merna transaction, the largest transaction in the market’s history, indemnity-triggered transactions still totaled USD1.2 billion. This adjusted total is a 44 percent increase[3] over 2005’s previous record high of USD859 million and more than seven times greater than the USD173 million of indemnity-triggered issuances in 2006.

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  1. For transactions issued in denominations other than USD, principal amounts are converted as of the issuance date.
  2. Estimates of global and U.S.-only reinsurance property limits (USD169 billion and USD81 billion, respectively) are as of December 2007 and are provided by Guy Carpenter & Company, LLC.
  3. All figures have been rounded; calculating percentages based on figures in their current form may not yield stated growth rates.

*Securities or investments, as applicable, are offered in the United States through GC Securities which is a division of MMC Securities Corp., a US registered broker-dealer and member FINRA/SIPC.  Main Office:  1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. Advice on securities or investments in the European Union is provided through GC Securities Ltd., authorized and regulated in the U.K. by the Financial Services Authority.  Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC.  MMC Securities Corp., GC Securities Ltd. and Guy Carpenter & Company, LLC are affiliates owned by Marsh & McLennan Companies.  This communication is not intended as an offer to sell or a solicitation of any offer to buy any security, financial instrument, reinsurance or insurance product.

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