Guy Carpenter, MMC Securities Release Cat Bond Survey

March 6, 2007

Guy Carpenter & Co., the global risk and reinsurance specialist of the Marsh & McLennan Companies, and its affiliate MMC Securities Corp. have published their fifth annual Cat Bond survey: “Catastrophe Bond Market at Year-End 2006: Ripples Into Waves.”

The report examines natural catastrophe bond transaction activity, as well as trends and market dynamics. Among its more important conclusions, the report found that “the market momentum resulting from the record storm activity of 2004 and 2005 continued into 2006, with activity across virtually all measurable dimensions surpassing previous records by a large margin.”

“When we looked at the catastrophe bond market one year ago, the effects of the record storm activity, led by Hurricane Katrina, were beginning to be felt, with record totals in risk capital issued and total risk capital outstanding, as well as new highs in the number of bonds placed and first-time sponsors,” explained Christopher McGhee, head of Guy Carpenter’s Investment Banking Specialty Practice and Managing Director of MMC Securities. “In 2006, these initial ripples grew into a massive wave of market activity. In nearly every measurable way, 2006 was, by some distance, the most active year in the history of the catastrophe bond market, principally driven by the 2004 and 2005 hurricane activity.”

Guy Carp’s report found that over the last two years “the total annual catastrophe bond issuance has more than tripled. Total issuance in 2006 stood at $4.69 billion, representing a 136 percent increase over the previous record of $1.99 billion in 2005, and a 311 percent increase over the $1.14 billion issued in 2004.

“A total of 15 sponsors completed 20 new transactions in 2006, representing a new high in transaction volume. In terms of total risk capital outstanding, the market also saw record growth, with more than $8.48 billion of bond principal outstanding at the end of 2006 – a 74 percent increase over the year-end 2005 total of $4.90 billion.”

McGhee said the implications of this “record catastrophe bond activity” are still uncertain. He noted that the “explosive growth we saw in 2006 was driven by a number of factors working in tandem, including a tightening in capacity, increased costs in the traditional market and model changes.

“All of these trends resulted from the 2004 and 2005 storms. Given the relative lack of U.S. hurricane activity in 2006, it is unclear whether the market momentum will continue into 2007. What is clear, however, is that capital markets will continue to play an increasingly important role in risk transfer.”

Among the report’s highlights were the following:
— Dramatic Increases in Securitization – There was a sizable increase in securitization activity in non-bond form in 2006, including vehicles such as sidecars and Industry Loss Warranties (ILWs), as sponsors sought new ways to transfer and manage catastrophe risk.
— Expansion of the Catastrophe Bond Market’s Risk Profile – Though Standard & Poor’s BB rating (or equivalent) remains the industry standard, there was a notable increase in 2006 in the number of B-rated and unrated issuances.
— New Non-Insurance Catastrophe Bond Issues – Two non-insurance entities, FONDEN, a facility created by the government of Mexico, and Dominion Resources, Inc., a U.S. based energy company, sponsored new catastrophe bonds in 2006.
— New Risks Securitized – Four new risks – Australian typhoon and earthquake and U.S. typhoon and hail – were securitized for the first time in 2006. In addition, Japanese typhoon risk was securitized for the first time since 2003. Priced at a notable discount to peak peril cat bonds, these issues allowed cat bond investors to geographically diversify their investment portfolios.

Copies of the full report are available for download at: www.guycarp.com. For printed copies, contact Guy Carpenter at: marketing@guycarp.com.

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