By MATTHEW BRODSKY, senior editor/Web editor of Risk & Insurance®
The end of November saw two new issuances of catastrophe bonds--the $175 million Montana Re (issued by Flagstone Re for U.S. hurricane and quake risk) and the $150 million Successor X (issued by Swiss Re for California quake and Atlantic hurricane risk). Both cases illustrate the newfound interest from conventional investors that's driving the insurance-linked securities market.
Investor demand led to the "upsizing" of these and other recent bonds. According to industry blog Artemis, Montana Re was originally slated to be $120 million, Successor X just $50 million.
One reason to explain this trend, said Chi Hum, managing director of GC Securities, is that existing investors need somewhere to go with their money. Old CAT bonds have matured in 2009 and billions more will mature in early 2010, and that money needs to be reinvested in new bonds. Pent-up demand is also being unleashed since late 2008, when no new issuances took place during the Lehman bankruptcy and overall financial turmoil. Plus, said Hum, large institutional investors, like endowments and pension funds, are coming into the market.
"So they're flush with cash," he said.
Optimists predicted that the market in 2009 would bounce back to $3 billion to $4 billion of new issuance, and it appears that target will be met, he added.
New investors are attracted, in part, because of changes in how things get done with the collateral behind CAT bonds.
Take the Montana Re deal. As explained by Peter Nakada, managing director of RMS RiskMarkets (the modeler that worked on the deal), the collateral agreement for the bond follows the 2009 trend, using a tri-party repo agreement. In these setups, banks agree to sell the securities backing the bond to a collateral trust, then to buy back the securities at a later date for the same amount plus interest. In the meantime, if the bond gets triggered, those securities could be liquidated. Or say the bank handling collateral goes under--a la Lehman. With this new setup, the bond holders would be further up the line under bankruptcy laws.
Both Montana Re and Successor X also point to a possible return of reinsurers to the market.
One of the trends of 2009, according to Guy Carpenter's Hum, is that issuing CAT bonds had been an expensive way to hedge risk, so reinsurers stayed away. Primary carriers drove 2009 issuances, generally in search of diversification in their reinsurance.
Now that prices have come down from the highs of the first half of 2009, perhaps bonds will attract more reinsurers back to the capital markets.
Nakada sees the potential for the market to return to pre-2008 issuance levels--in the $7 billion range. With Montana Re, he said, he was also impressed by the sophistication and preparedness of the issuer, Flagstone Re.
"Flagstone really had its act together in terms of modeling," he said. "The more an issuer knows their modeling, the more quickly and efficiently you can get the transaction done."
What could be more interesting in 2010 would be the emergence of sophisticated corporate issuers. That is, global companies looking to bypass primary carriers and reinsurers to transfer risks directly to the capital markets. There are precedents, a half a dozen of them.
"We're getting a lot of inquiries on that side," said Hum.
Three additional bonds are slated for December 2009: SCOR's Atlas VI, Swiss Re's Redwood Capital XI and Travelers' Longpoint Re II, according to Artemis' Deal Directory.
December 7, 2009
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