By MATTHEW BRODSKY, senior editor/Web editor of Risk & Insurance®
More than 300 participants came to the 5th Annual Insurance Linked Securities Summit in New York City on Jan. 28 to hear from industry leaders what they already knew: the market is hanging in there.
The ILS meeting among investment fund managers, (re)insurers, brokers, modelers and bankers covered the spectrum of financial instruments for life and nonlife, but in particular we're talking here about catastrophe bonds.
Rumor was afoot at the end of 2008 that the CAT bond market was in trouble. No new bonds were issued in the fourth quarter, ending the year at a somewhat disappointing total of 10 issuances for less than $3 billion. Compare that with the record year in 2007 with 27 and $7 billion.
Yet while hurting, the market seems to be pointed up, not further down, in 2009.
How can this be possible in today's bleak investment landscape? Because CAT bonds are still relatively uncorrelated to financial risk. After all, what's the cause and effect between a hurricane landfall and a recession? Nothing, unless you believe in some mighty fierce cosmic karma.
And investors still realize this.
"We like this asset class on a long-term basis," said Niraj Patel, managing director of credit derivatives and ILS at Genworth Investments, during a panel on investor perspective.
Still, what will happen in the short term? From the discussion at the summit, it appears part of the short-term strategy is to assure everyone the market's not that bad off.
While new bond issuance stagnated in 2008, the secondary market saw activity. Hedge funds were selling the bonds to make margin calls on other investments, and other investors were willing to step in.
That was an "excellent sign that there is liquidity in the market," said Greg Hagood, principal and co-owner of Nephila Capital.
And bonds, though worth less, pulled in better returns than most other investment classes. As reported by Swiss Re Managing Director Dan Ozizmir, one CAT bond index fund earned returns of 7.96 percent from January 2007 through October 2008. That's positive 7.96 percent.
The other part of the short-term strategy is all about a healthy dialogue between investors and issuers aimed at a secure long-term future. Namely, they're talking about issues of transparency and the need for collateral structures that truly take credit risk out of the equation.
As Hagood said, investors already have "credit risk up to their eyeballs." They get into CAT bonds to escape it--to diversify into Texas hurricane risk, for instance. One of the reasons for the big freeze-up in 2008 was because investors got terrified that escape was impossible. When Lehman Brothers went belly up, four CAT bonds were feared doomed, too, because the investment bank was their so-called total return swap counterparty, guaranteeing pieces of the collateral and investor returns. (One, Willow Re, is expected to default any minute now, according to industry sources.)
Yet from the sounds of it, investors, bankers and insurers are willing to work together to make sure, never again.
"If properly addressed, it will no longer be a topic," said Beat Hollinger, managing director of Munich Re Capital Partners.
"It's a big issue, and to downplay it would be wrong," warned Paul Schultz, president of Aon Benfield's Investment Banking Group, adding however, that confidence in the market could return after a couple new bonds get issued, at which point everyone then examines how they were successfully structured.
This process could already be under way. ILS summit attendees already knew that French-based reinsurer Scor issued a $200 million bond through its Atlas Reinsurance V Ltd. The general insurance public heard the news on Jan. 29.
"There's a very serious interest in doing more in this market," said Schultz. "Everyone wants to consider it, everyone wants to find a way into the marketplace."
January 30, 2009
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