Although the European securitization market might not have seen the worst yet from the credit crisis, insurers who focus on instances of catastrophe are making strides.
Insurance-linked trading volume is growing, as evidenced by issued deals that are oversubscribed and performing well.
"The non-correlation argument worked, and since most of these securities were not highly leveraged as many other ABS products were, there are no forced liquidations," said Albert Selius, managing director at Swiss Re. "There is still huge demand and, unlike other segments of securitization, this market is robust and liquid."
Selius joined Swiss Re in 2001 and was instrumental in the creation of the current insurance-linked securities division at the firm. He is responsible for all trading in insurance-related securities and derivatives as well as reinsurance industry loss warranties.
Fitch Ratings recently said that it believed that insurance-linked securitizations will pick up this year. In addition to the "traditional" catastrophe bond, recent years have seen a proliferation of new structures to transfer natural catastrophe risk, including reinsurance sidecars, and catastrophe and synthetic CDO structures.
Recent offerings have transferred a variety of life and non-life insurance risks to the capital markets, including Regulation XXX and AXXX reserve risk, long-term disability reserve risk, catastrophic mortality risk, life insurance value-in-force (present value of net cash flows) and reinsurance recoverable risk. "This is a time of innovation and rapid change with new hybrid structures and variations on traditional structures being introduced to the market regularly," Fitch said.
Europe is positioning itself for sure footing if a boom hits. This year Lloyds' insurer Amlin launched its new Investment Management Partnership, which manages funds focused in traded insurance risk. It's the first such venture to be backed by a Lloyds' division. Allianz Leben, a unit of the German insurer Allianz, said it plans to buy 2 billion ($3.09 billion) of ABS, the insurer's chief investment officer told the German financial press.
Recently, Swiss Re and UBS announced that they had closed one of the first indemnity reinsurance securitizations, called Valais Re, for Flagstone Reinsurance Holdings. Flagstone purchased a three-year fully collateralized retrocessional coverage on an indemnity basis from Valais Re, a special purpose reinsurer established in the Cayman Islands.
The deal gives Flagstone indemnity protection on its global reinsurance portfolio, allows Flagstone to issue further additional series of notes in the future and has issued $64 million of annual aggregate class-A notes and $40 million of per-occurrence class-C notes to collateralize its obligations under the retrocession agreement. The portfolio is composed of risks including U.S. and European wind storms and earthquakes and Japanese typhoons and earthquakes.
Selius said that a number of similar deals are also being marketed now as new money enters the insurance-linked securities arena and issuers take advantage of the softening market.
However, Selius said that while the insurance-linked securitization market has seen growth over the years, most of this increase has happened in the single-B and double-B non-investment-grade area.
"The big hope was that insurers could start packaging triple-A and double-A tranches, but with the current credit crisis there are reluctant buyers of any high-grade structured finance instruments," he said. "We still have high hopes for the high-investment-grade area, but the fact is that in this market people don't want to invest in anything that has to be leveraged for a return." Selius said there was still some demand for this investment-grade paper and that deals have closed but most are on a smaller scale.
Structuring cat bonds has become more appealing for investors who understand that this type of risk isn't levered. Selius said that funds are opening with frequency dedicated to the sector, and some are beginning to express an appetite for higher-grade risks because they realize that these assets have withstood the turmoil.
Why Europe has suddenly picked up more momentum may be on the back of new technology that allows the industry better access to claims data. Selius notes that Swiss Re worked with a consortium of European insurers to create a claims data platform that offered estimates of payments after events so that this information could be easily accessed by people looking to structure deals around these loss estimates. "It could help grow securitizations going forward since much of the U.S. market is based on a similar platform," he said.
But the real growth potential right now is in China, Selius said. "The Chinese earthquake really highlighted the fact that there is very little insurance penetration in China, and we are hoping for this to be a large growth area," he said.
Another venture worth noting is the structure Swiss Re launched in Guatemala and El Salvador - a product the company coined as creating "good leverage." The transaction takes charitable donations and creates a bond that leverage the donations almost 50 to 1. The product focuses on people that are affected by an earthquake so that funds would be immediately available to them.
"It's good leverage as opposed to just leveraging for returns," Selius said. "We've created this product to market to other foundations and can apply it to relief efforts in other areas, where it's needed."
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