December 29th, 2009

2009 Top Stories: Capital Markets

Posted at 12:30 AM ET

With 2009 coming to a close, this week we’re taking a look at the most popular stories of the year.

Cat Bonds Persevere in Tumultuous Market*: A slow issuance year in 2008 masks a story of resilience and risk management flexibility. After a record-setting year in 2007, catastrophe bond issuances fell 62 percent by issuance volume and 52 percent by transaction count last year. During the first half of the year catastrophe bond issuance was tempered by ample capacity and favorable rates in the traditional reinsurance market, dampening sponsor demand for alternative capacity sources, with the fourth quarter quieter than expected. Overall, however, catastrophe bonds generally withstood the impact of onerous market forces and survived a substantial financial market test of their utility as risk and capital management instruments.

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Cat Bond Update: Second Quarter 2009: The catastrophe bond market continues to advance, though issuances are down from 2008. The activity represents a positive rally from the hiatus during the second half of 2008. For the first half of 2009, nine bonds have been issued, with aggregate risk capital of USD1.38 billion. The continuing stabilization of financial markets and a decrease in catastrophe bond spreads, however, could result in more issuance activity in the second half of the year, particularly for sponsors which had considered issuances in the first and second quarters but deferred their plans because catastrophe bond spreads were considered to be too wide (i.e., catastrophe bond protection was considered to be too expensive).

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Cat Bond Update: First Quarter 2009: A strong first quarter has demonstrated that catastrophe bonds are still important tools for risk managers, treasurers, and CFOs. After five months of silence since the last issuance in mid-August 2008, three bonds closed in the first quarter of 2009 bringing USD575 million in fresh capital and confirmation that these instruments are still attractive investments, despite the ongoing the global financial catastrophe. Investor marketing for a fourth catastrophe bond issuance began in the first quarter but is expected close in the early part of the second quarter. Issuance levels are consistent with the first quarter of 2008, a year that seemed likely to be the second-busiest in the history of the catastrophe bond market until the financial crisis accelerated in the fourth quarter of last year.

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Cat Bond Update: Third Quarter 2009: The third quarter is traditionally quiet for the catastrophe bond market, and 2009 was no exception. Two transactions were closed, resulting in USD412 million in new risk capital. Nonetheless, risk capital issued was up by a third relative to the same quarter last year, as both catastrophe bonds issued were upsized considerably. The consensus estimate for the entire year remains USD3 billion to USD4 billion, implying a strong fourth quarter for primary issuance.

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Catastrophe Bonds — Safe from the Storm: Last year, a financial catastrophe shook major market centers around the world. Several prominent, global banks have all but disappeared. Yet, insurers and reinsurers, in general, have persevered. We have been able to absorb the losses in capital triggered by both economic conditions and the second-busiest catastrophe year in at least four decades. But, these developments have changed our business, from perspective to transaction. This is particularly evident in the market for insurance-linked securities (ILS).

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