Hannover Re said last week that it had completed its first insurance-linked securities (ILS) transaction.
A special-purpose entity named Globe Re was established in Bermuda for this transaction, which is capitalized at $133 million.
The transferred portfolio in the Globe Re deal consists exclusively of U.S. catastrophe business, predominantly hurricane risks in Florida. The reinsurance intermediary Benfield brokered the relevant contracts and modeled the portfolio.
Globe Re is funded by a $33 million equity tranche as well as $100 million in bonds. Benfield and Hannover Re have participated in the equity tranche in amounts of $20.5 million and $5 million, respectively. The bonds - split into three Standard & Poor's-rated tranches of BBB-', BB' and B' - were placed with institutional investors primarily in North America. The investors receive an attractive coupon depending on the risk category. The transaction has a one-year term.
Unlike Hannover Re's previous securitizations, the company's interest in this transaction is not to protect its own business but to directly transfer its clients' business to the capital markets.
"With this type of pooling and transformer function, we enable ceding companies to access the capital markets - even for risks that would not lend themselves to this on an independent basis," Chief Executive Officer Wilhelm Zeller said.
This "sidecar" type deal allows investors to take on the risk and return of a wide group of insurance policies, and because it's a completely different type of risk than what traditional reinsurance investors have access to, the company believes investors will also find some opportunity for diversification as a result.
Globe Re marks the first deal to emerge from Hannover's recently established insurance-linked securities department that was set up at the beginning of the year. The new unit works together with international reinsurance brokers to structure risks from primary insurers and transform them into securities that can be placed on the capital market. The cooperation with the reinsurance intermediary Benfield is the first successful example of this approach. "We are looking to complete more deals this year, and we started this department specifically with this aim," a company spokesperson said.
Insurance-linked securities deals are slated to take off this year, as conditions in the capital markets have ironically created an ideal platform for insurers. Most of these securities are not highly levered, as many other traditional ABS products have been, and market sources said that, as a result, there is still huge demand from traditional reinsurance investors as well as ABS investors.
"Interest in insurance-linked securities continues to grow, not least because they are largely uncorrelated with equity or debt," Tibor Winkler, director of risk markets at Risk Management Solutions, said. "Catastrophe bonds offer attractive spreads and are capturing the attention of multi-strategy hedge funds in addition to the traditional audience of specialist funds, arrangers and reinsurance companies. With credit spreads starting to return to pre-crunch levels, the relative value of insurance-linked securities in a portfolio is becoming clear again."
This year has already seen a number of innovative transactions price. Swiss Re this month priced its first indemnity-linked insurance securitization deal. The $104 million two-tranche Valais Re transaction for reinsurance firm Flagstone provided a three-year retrocessional cover. Indemnity-linked insurance securitizations are deals that pay out based on actual losses and not index triggers.
AXA began marketing its 61 million ($94 million) car insurance-linked securitization managed by Natixis. The deal, which was named SPARC Europe (Junior) Compartment 2008, is the third transaction from the SPARC series and will involve the transfer of risk associated with more than seven million AXA insurance policies. The deal is being offered to a mix of insurance-linked ILS investors and traditional ABS buyers.
RMS's newly launched portfolio management platform called Miu should continue to support new entrants to the insurance-linked securitization sector because it will enable market participants with relatively limited insurance experience to model, understand, underwrite and trade ILS and other forms of insurance risk with increased confidence.
In the past, the opportunity to invest in insurance-linked securities has been restricted by the uncertainty surrounding the overall portfolio risk, but Miu aims to create a level playing field where investors can quickly access where their risks are, what drives them and how one catastrophe might affect their entire portfolio. The new platform should also help increase secondary liquidity of insurance risk because insurers can quickly quantify and tailor a portfolio of catastrophe risk positions packaged in any form: catastrophe bonds, over-the-counter (OTC) derivatives, sidecars, industry loss warranties (ILWs) and various forms of reinsurance.
"This is a process that looks geared to start to really take off this year," said the Hannover spokesperson. "It's clear, however, that investors are going to need time to get used to these types of risks and how to evaluate them at different levels."
The spokesperson said that for the time being only peak risks, like major earthquakes, will be looked at for securitization, but traditional reinsurance would continue to be more accessible for all other types of risks.
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