Dedicated funds have proved crucial to the develop of CAT bonds and they will remain so, according to Brian Douglas, vice president at Goldman, Sachs, speaking at one of the last panels of the American Securitization Forum’s 2013 conference.
He was referring to funds devoted to this 20-year-old asset class that are either standalone or affiliated with an insurance company. They invest the money for long-term investors.
“These dedicated funds have tripled or quadrupled in the past few years,” Douglas said, adding they accounted for about 62% of placed deals in 2012, from 47% in 2007.
Their management fees tend to be reasonable given the seasoned expertise they provide the end investor, according to Douglas. “They’re running the catastrophe models…they’re able to see more of the market.”
One investor group that has vanished from the CAT bond sector in the last several years are the banks. While taking about 10% of bonds in 2007, they were nonexistent last year thanks to tighter capital requirements.
Keith Kennerly, managing director at Aetna, said one of the advantages to securitizing insurance risk is that the issuer can reduce its counterparty risk. The more traditional way to offload risk — buying reinsurance —involves dealing with the same players, he said. Securitization is a way to diversify.
Kennerly also said that to the extent that CAT bond issuers can get their bonds into the investment-grade category it is worth trying. A recent deal by Aetna that had an investment-grade tranche allowed the company to reach “deep-money” investors, he added.