November 24th, 2010

Catastrophe Bond Update: Third Quarter 2010 – Activity (and Great Expectations) Persists, Part II: Risk Capital Outstanding, Industry Loss Warranties

Posted at 1:00 AM ET

GC Securities, a division of MMC Securities Corp.*

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Risk Capital Outstanding

Total risk capital outstanding declined from the second quarter of 2010 to the third quarter, reaching USD10.99 billion - down from USD11.82 billion. This represents a net decrease of USD826 million (7 percent). Risk capital outstanding has declined in each quarter of 2010 thus far. While this is not surprising given the roll-off of the bulk of the USD7 billion issued in 2007, it also suggests the cat bond market should have a strong appetite for additional transactions during the fourth quarter of 2010 and into 2011.

Risk capital outstanding peaked at the end of 2007, at USD14.02 billion. It then fell to USD12.04 billion by the end of 2008. Buoyed by a stabilizing financial system, risk capital outstanding increased over the course of 2009 to USD12.51 billion, before declining to USD10.99 billion over the course of 2010 year to date. Its current level is consistent with mid-year 2006.

3rd-q-cat-2

Industry Loss Warranties

The industry loss warranty (ILW) market began to settle again early in the third quarter after the temporary surge in rates witnessed at the start of the U.S. hurricane season. After a frenetic period where it was difficult to find carriers to support even small limits, pricing stabilized and then started to fall as it became clear that the active hurricane forecasts, while accurate with respect to storm formation rates, did not translate into land falling storms along the U.S. Atlantic seaboard.

As is customary in the ILW market in the fourth quarter after benign U.S. storm seasons, protection buyer interest will be predominantly driven by short period ‘profit protection’ contracts as underwriters seek to lock in favorable loss experience for the year.

Contributors
• Chi Hum, Managing Director
• Cory Anger, Managing Director
• Hong Guo, Managing Director
• Ryan Clarke, Vice President
• Brad Livingston, Analyst

ILW Market commentary provided by
• Barry Law, Managing Director (Guy Carpenter London)
• David Rothestein, Vice President (Guy Carpenter London)

* 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, Inc. 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.

Chi Hum, Cory Anger, Hong Guo, Ryan Clarke and Brad Livingston are registered representatives of MMC Securities Corp.

Read Catastrophe Bond Update: Third Quarter 2010 – Activity (and Great Expectations) Persists, Part I: Issuance, Redemptions >>

Read Catastrophe Bond Update: Third Quarter 2010 – Activity (and Great Expectations) Persists, Part III: Market Dynamics >>

Read Catastrophe Bond Update: Third Quarter 2010 – Activity (and Great Expectations) Persists, Part IV: Outlook for Fourth Q 2010 and First Q 2011 >>

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