March 9th, 2009

Seasoned Sponsors Own Market, Mostly Primaries

Posted at 1:30 AM ET

GC Securities, a division of MMC Securities Corp.*

Insurers outpaced reinsurers in terms of the amount of risk capital accessed via the catastrophe bond market in 2008. Primary insurers completed six transactions securing USD1.6 billion of protection from the catastrophe bond market in 2008, over USD 434 million more than the USD 1.1 billion accessed by reinsurers though seven transactions. Overall, most of the bonds came from repeat sponsors, ostensibly familiar with how to navigate the catastrophe bond market effectively and the ability to benefit from established relationships with capital market capacity providers and utilize existing shelf programs. Excess reinsurance capacity at the beginning of the year and market turbulence in the fourth quarter helped keep most potential first-time issuers on the sidelines.

The USD1.6 billion of capital secured by primary insurers was down 51 percent from USD3.2 billion in 2007. But, this decline is slower than the 62 percent drop in capital issued for the total market. Reinsurer catastrophe bond issuances fell at a further increased rate from USD3.6 billion in 2007 to USD1.1 billion in 2008 (a 70 percent reduction).

The substantial drop in reinsurer issuances (compared to those of insurers) results in part from the cedent-advantaged market conditions in the first half of 2008. Additionally, an increase in retentions among primary insurers diminished the need for reinsurer-sponsored catastrophe bonds. Further, the strong capital positions held by reinsurers reduced the need to transfer risk. Primary insurers on the other hand continued to sponsor cat bonds, capitalizing on favorable market conditions and seeking to further integrate the capital markets as a diversifying funding source. Catastrophe bond protection was used to offset additional retentions and provide additional remote cover providing protection for particularly severe events and managing rating agency capital needs.

The vast majority of risk capital obtained in 2008 was for repeat sponsors . Only four catastrophe bonds, representing USD764 million in principal, came from first-time sponsors. More than 73 percent of capital (USD1.9 billion) and 69 percent of issuances (nine) were from repeat sponsors. Most catastrophe bond capital, therefore, went to insurers and reinsurers that understand how to use catastrophe bonds as a strategic source of capacity.

*Securities or investments, as applicable, are offered in the United States through GC Securities, 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. Securities or investments, as applicable, are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd., which is authorized and regulated by the Financial Services Authority. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC. MMC Securities Corp., MMC Securities (Europe) 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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