Friday, December 10, 2010

The Shareholder Wealth Effects of Insurance Securitization: The Case of Catastrophe Bonds

By Bjoern Hagendorff, Jens Hagendorff, and Kevin Keasey

Abstract: Insurance securitization has long been hailed as an important tool to increase the underwriting capacity for companies exposed to catastrophe-related risks. However, global volumes of insurance securitization have remained low to date raising questions over its benefits. In this paper, we examine changes in the market value of firms which announce their engagement in insurance securitization by issuing catastrophe (Cat) bonds. Using a unique sample which consists of the near population of Cat bond issues by listed companies, we report some limited evidence that Cat bonds have positive performance effects as captured by wealth gains for shareholders in the issuing firm. More important, however, gains from Cat bonds appear to be linked to issuers optimizing the cost of catastrophe risk underwriting. Thus, abnormal returns are particularly large for issues by firms whose risk-profile will make it difficult to obtain competitively-priced reinsurance coverage as well as for issues during periods when prices for catastrophe coverage (including Cat bonds) are low.

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Wednesday, November 3, 2010

Swiss Re places EUR 275 million of European windstorm risk on behalf of AXA (Swiss Re)

Swiss Re Capital Markets has successfully structured and placed EUR 275 million of notes issued by Calypso Capital Ltd. (“Calypso”) covering European windstorm events. Calypso is a special-purpose company incorporated in Dublin, Ireland. The transaction sponsor is AXA Global P&C.

The notes, which provide protection on an occurrence basis, are the first to utilise a PERILS index trigger weighted by CRESTA zone (country-specific zones for uniform data reporting) and by line of business.

Calypso's single tranche series 2010-1 notes are the first issuance under a EUR 1.5bn principal-at-risk variable-rate note shelf programme. The three-year notes are rated “BB (sf)” by Standard & Poor’s and are scheduled for redemption in January 2014. Collateral for this issuance consists of a global master repurchase agreement with BNP Paribas.

Calypso was structured to provide AXA Global P&C with cover for European windstorms in Belgium, Denmark, France (excluding overseas territories), Germany, Ireland, Luxembourg, The Netherlands, Switzerland, and the U.K.

“We are pleased to support AXA's risk management objectives with a transaction that is the largest single European wind exposed ILS issuance to date. It marks further strategic leverage of the data supplied by PERILS,” said Jean-Louis Monnier, Swiss Re's Head of ILS Europe. “The ILS market continues to benefit from the enhanced transparency that PERILS brings to the European insurance sector."

Swiss Re Capital Markets acted as a structuring agent and joint bookrunner for the offering.

Independent third-party risk analysis for the notes was provided by EQECAT, Inc.

The Calypso notes were sold in a private placement pursuant to Rule 144A of the U.S. Securities Act of 1933, as amended, (the “Securities Act”) and have not been registered under the Securities Act or any state securities laws; they may not be offered or sold in the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws.

Tuesday, August 31, 2010

Swiss Re says time is running out for effective longevity funding solutions

Swiss Re today publishes its report “A short guide to longer lives: Longevity funding issues and potential solutions”:
The report warns that underestimating life expectancy by just one year can increase a pension plan's liabilities by up to 5%. It examines what (re)insurers and other parties can do to help address the challenges faced by societies as a result of increased life expectancy. The report also includes recommendations for the key parties involved in addressing longevity funding issues.

Over recent years, people’s life expectancy has risen substantially and this trend is likely to continue. Swiss Re’s report looks at what governments, pension plans, insurers and reinsurers can do to help address the challenges faced by societies as a result of increased life expectancy.

Christian Mumenthaler, Head of Life & Health Products and member of Swiss Re’s Group Management Board, says: "While life expectancy is on the increase, the time required for implementing effective longevity funding solutions is running out. Insurers, governments and pension providers must act now to ensure that living longer remains a benefit to society, rather than a financial burden."

Insurers and pension funds have an obligation to pay and reserve for accumulated pension benefits. Underestimating life expectancy by just one year –a relatively small miscalculation – can increase liabilities by up to 5%. So, for a pension plan with USD 1 billion of liabilities, an extra USD 50 million would need to be funded.

UK longevity market most developed

While the trend towards longer lives is global, some markets are impacted to a greater degree from a funding point of view. Though currently most developed in the UK, longevity insurance activity is expected to develop in a number of markets, including the Netherlands, the US and Switzerland – countries with material exposures and a high level of private pension provision.

Well-diversified (re)insurers are a natural home for longevity risk

A well-diversified (re) insurer will have a combination of mortality risk and longevity risk along with other non-correlated insurance perils, such as property and casualty. This type of diversification means insurers are often the ‘natural home’ for longevity risk. The recent development of insurance-based (or “indemnity”) solutions are an important factor in transferring longevity risk to these natural holders.

Recommendations for the parties involved:

  • Employers and pension plan trustees should assess whether they are reserving for longevity at an appropriate level and examine the feasibility of transferring some, or all, of the risk.
  • The insurance industry must encourage the development of more sophisticated risk models that recognise potential future longevity trends, especially in light of Solvency II and similar regulatory initiatives.
  • Governments and regulators need to consider re-aligning retirement ages with life expectancy and implement consistent regulation and accountancy guidelines. Additionally, governments should look to public-private partnerships to address their own longevity exposure through defined benefit schemes, which are backed by the state. Governments should also support the development of a longevity capital market through the publication of reliable, consistent mortality data to allow the production of transparent and robust indices. Annuity providers will need additional longevity capacity in the longer term and the capital markets may be able to provide some of this.

To find out more and download the report go to:

Friday, August 13, 2010

Alternative Risk Transfer: Part II, Non-Life Utilization of Insurance-Linked Securitie

By Christopher Kampa and Paul Siegert

Abstract: Part II of the Alternative Risk Transfer Series, "Non-Life Utilization of Insurance-Linked Securities, " provides an overview of the non-life insurance-linked securities sector, from the first securities issued - catastrophe bonds - to derivatives and synthetics. This paper charts the industry developments that have created a wide avenue of risk management techniques, allowing for the hedging of risks that were previously thought to be uninsurable.

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Thursday, August 12, 2010

Guy Carpenter Q2 2010 CAT Bond Update: Index to articles

Catastrophe Bond Update: Second Quarter 2010 - Activity Surges…Reflecting Favorable Issuance Conditions and Strong Investor Demand: Part I: In the second quarter of 2010, eight catastrophe bond transactions were completed, and USD2.05 billion of risk capital was issued, making it the second most active second quarter on record. USD1.70 billion of this total (and all but one transaction) included exposure to U.S. wind as sponsors and investors focused on this peril, leading into what is expected to be an active North Atlantic hurricane season.

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Catastrophe Bond Update: Second Quarter 2010 - Activity Surges…Reflecting Favorable Issuance Conditions and Strong Investor Demand: Part II: Execution Study and Further Commentary on Second Quarter Market Dynamics: During the fourth quarter of 2009, the first quarter of 2010 and the beginning of the second quarter of 2010, transactions had generally been reaching issuance targets or upsizing and pricing at or below the midpoint of their initial spread guidance range. This trend moderated and in some cases reversed itself during the second quarter of 2010 as investors, though flush with cash due to inflows and maturities of existing positions, were disinclined to accept additional U.S. wind risk. Because nearly all of the new issuance available during the second quarter included U.S. wind exposure, transactions coming to market in late April or May faced more challenging market conditions which in some cases resulted in concessions being made by protection buyers with respect to deal size and spread levels.

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Catastrophe Bond Update: Second Quarter 2010 - Activity Surges…Reflecting Favorable Issuance Conditions and Strong Investor Demand: Part III: Second Quarter 2010 versus First Quarter 2010 and Second Quarter 2009: Second quarter of 2010 issuance activity increased relative to first quarter of 2010, both in terms of transaction count (eight versus six) and risk capital issued (USD2.05 billion versus USD808 million). Median transaction size was USD245.0 million in the second quarter of 2010 relative to USD125.0 million in the second quarter of 2009. Increased transaction size is due primarily to market conditions. In the first six months of 2009 spreads were at or near their all time widest levels due to lingering credit crisis concerns and expectations of an active 2009 North Atlantic hurricane season. Spread levels have tightened 20 to 30-percent year over year, due to increased systemic stability, net new inflows into catastrophe bond asset managers, maturities of outstanding bonds, and competitive pressure from the traditional reinsurance market that continues to tighten. At lower spread levels, sponsors that had reduced or even postponed their catastrophe bond transaction during the second quarter of 2009 elected to target increased transaction sizes during the second quarter of 2010.

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Alternative Risk Transfer: The Convergence of the Insurance and Capital Markets

By Christopher Kampa and Paul Siegert, Insurance Studies Institute

Abstract: Part I, "A Broad Overview," details the evolution of Insurance-Linked Securities (ILS). Once considered to be an alternative form of risk transfer, ILS have become a mainstream method for transferring risk from insurers to the Capital markets. Parts II and II, to be released in late summer 2010, provide a micro-analysis of the non-life and life insurance-linked security sectors.

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Monday, August 9, 2010

Hymans-Robertson Update on Pension Buy-outs, buy-ins and longevity hedging

Welcome to our quarterly update, where we summarise the activity in the buy-out, buy-in and longevity hedging market during the second quarter of 2010, as well as a full overview of the past 12 months.