LONDON (Bloomberg) — Hannover Re, the world's fourth biggest reinsurer, plans to sell bonds that will protect it from losing money when other insurance companies default.The Hannover, Germany-based company is selling [EURO]95 million ($123 million) of securities that allow investors to take on the risk of 100 insurance and reinsurance companies declaring bankruptcy or being unable to pay a claim, according to a report by Standard & Poor's.

"This is a way for Hannover Re to transfer credit risk that they become exposed to when buying reinsurance," said Clare Hennings, managing director in the insurance products group at Societe Generale SA in London, which is arranging the deal.

Insurers are increasingly turning to the bond market as a way to pass on the risk of losses ranging from natural disasters to jumps in mortality rates. The size of the market for so-called insurance-linked securities reached $25 billion in September 2006, Fitch Ratings said in December.

Hannover Re's notes will package the default risk of a portfolio of companies, unlike a typical catastrophe bond that's linked to one-off events such as hurricanes or earthquakes. The note is a collateralised debt obligation, a security that pools bonds, loans or credit-default swaps and uses the income to pay investors.

The bonds are the first rated securities that transfer the default risk of only insurance companies, said Societe Generale's Hennings.

Hannover Re will buy protection against insurers going bankrupt through a credit-default swap from a special purpose company, which will then transfer the risk to investors in the form of bonds, according to S&P. Credit-default swaps are financial instruments based on corporate securities that are used to speculate on a company's ability to repay debt.

The reinsurance company will bear the cost of the first [EURO]60 million of losses, after which investors start losing their principal investment, S&P said in its report published January 29.

The insurance companies in the portfolio are spread across the US, Bermuda and Europe, with US insurers making up 65 percent of the portfolio. Societe Generale declined to disclose the names of the companies.

Hannover Re's special purpose company, Merlin CDO 1, will sell four bonds divided into varying portions of risk with ratings ranging from S&P's highest AAA ranking to BBB, one step above sub-investment grade status.

S&P is working on similar deals for other insurance companies, said Lapo Guadagnuolo, S&P's analyst responsible for rating Hannover Re's deal, without providing details.