September 16th, 2009

World Catastrophe Reinsurance Market 2009: Catastrophe Bond Update

Posted at 1:00 AM ET

worldcatGC Securities, a division of MMC Securities Corp.*

Six catastrophe bond transactions were completed in the second quarter of 2009, with USD808 million in risk capital coming to market. The number of bonds issued is down 25 percent year-over-year (from eight last year), and risk principal issued is off 54 percent from the USD1.75 billion issued during the second quarter of 2008. For the first half of the year, nine catastrophe bonds were issued, generating risk capital of USD1.38 billion. The first half of 2008 was more robust, with 11 transactions resulting in USD2.4 billion issued. From the first half of last year to the first half of this year, risk capital issued declined 42.5 percent, due in part to pricing conditions.


Offsetting new issuances, USD1.59 billion in catastrophe bonds matured in the second quarter of 2009, bringing the year-to-date total of matured risk principal to just over USD2.24 billion. Another USD960 million is scheduled to mature in the second half of the year.

Net catastrophe bond risk capital outstanding fell USD779 million (6.5 percent) from the first quarter of 2009 to the second quarter of 2009 - from USD12.0 billion to USD11.2 billion, as maturities outpaced issuances. The second quarter of 2009 was the second consecutive quarter in which total risk capital outstanding declined.

Risk capital outstanding peaked at the end of 2007 at USD14 billion and fell to USD12 billion a year later. Two quarters into 2009, catastrophe bond risk capital outstanding is at mid-year 2007 levels.

Collateral Solutions and Alternatives

Collateral solutions continue to attract attention, and several alternative approaches have been developed. Current options include :

  1. Total return swap with Federal Deposit Insurance Corporation-guaranteed bank debt
  2. Bank deposit
  3. Tri-party repurchase agreement
  4. Customized putable notes
  5. U.S. Treasury Money Market funds

The market is willing to support several alternatives to traditional collateral solutions, as long as they are perceived to be sufficiently transparent and insulated from credit risk. The existence of several choices enables sponsors to make decisions based on cost, protection, and other considerations that affect how they manage risk and capital. Further, by using several solutions simultaneously, the market is less likely to become “overweight” on one single solution, maintaining an element of diversification across collateral solutions. The result is another layer of protection from shock events that could have a negative impact on a single type of collateral solution.

Industry Loss Warranties

The Industry Loss Warranty (”ILW”) market, though trading a distinct product relative to catastrophe bonds, occupies a similar position as an alternative, supplementing traditional capacity, and is subject to similar supply and demand forces. In the first half of 2009, ILW providers were keeping their powder dry believing that there was a high probability of a capacity crunch for Florida property carriers at the June 1, 2009 renewal. However, this did not materialize, and ILW supply vastly exceeded demand. Capacity was withdrawn from the market, and rates fell by 15 percent to 20 percent. Yet, even this decline in pricing did not lead to much extra demand for the product.

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*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. Cory Anger and Chi Hum are registered representatives of MMC Securities Corp.

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