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Disaster bonds seen as a credit market bright spot
Growing risks posed by climate change are powering a surge in the sale of disaster insurance bonds, with the market forecast to grow in 2008 despite turbulence elsewhere in the credit market.
While the bottom fell out of the rest of the structured credit market last year, sales surged for catastrophe bonds or "cat bonds", which are issued by insurers to transfer the financial hit from natural disasters to investors.
The flow of people into disaster-prone areas such as Florida has raised the prospect of a $100 billion "mega-catastrophe", say analysts who see cat bonds providing a crucial source of capital to help pay the cost of such a crippling disaster.
Investors are being attracted to these bonds because their risks are fairly clear, in contrast to other structured credit products, whose values slumped last year as investors struggled to work out how much risk they contained.
"What has caused waves in other markets is that investors have lost money and they didn't know how," said Luca Albertini, Head of European ABS and insurance-linked securities origination and structuring at Swiss Re, a leader in this market.
"If there's a hurricane and you have to pay out, it's quite understandable."
New cat bonds totalling $7.7 billion were issued in 2007, versus $4.9 billion a year earlier and $2.1 billion in 2005.
Analysts see more growth for 2008 and say eventually cat bonds could mimic for example asset-backed securities and mortgage-backed securities, which in the U.S. have grown into a $7 trillion market over the past two decades.
"We believe the use of securitised products is set to expand in 2008," said Laurent Dignant, head of UK and European capital markets at Guy Carpenter, an reinsurance broker owned by Marsh & McLennan Cos Inc..
"This will probably come from an extension of traditional insurance-linked securities and new structures that will be developed to leverage investors' increasing appetite for insurance risk," said Dignant.
The growing hunger for cat bonds is also being fuelled by their attractive returns.
The Swiss Re BB-rated Cat Bond Index delivered a total return of 29.5 percent between Jan.1 2005 to Jan. 1 2008, compared to 16.9 percent for the Lehman Corporate BB High Yield Index -- a benchmark of similarly rated bonds.
While the rest of the credit market was in spasm between June and November of last year, the price fetched by cat bonds in the secondary market remained largely flat.
Some spreads dipped even, despite it being hurricane season, as bruised investors sought to buy into them as a safe haven.
NEW ISSUERS, DIFFERENT RISKS
With around $15 billion dollars currently outstanding, cat bonds make up a fraction of the $105 billion reinsurance market, where insurers have traditionally laid off their disaster risks.
But more insurers, and reinsurers themselves, are turning to them to help manage their disaster exposures. Nearly 40 percent of the cat bonds sold last year, by value, were from first-time issuers.
The market saw its biggest ever deal -- a $1.3 billion bond issued by U.S. insurance giant State Farm -- and there were also a string of new bonds by previous issuers covering different risks than they had previously.
One example was Allianz, which issued a $150 million bond covering UK flood risk as part of a planned $1 billion cat bond programme.
LANDMARK DEAL
A lynchpin to growth in 2008 will be whether the industry can build a wider investor base after the issue of the first proper collateralised debt obligation (CDO) of disaster risks.
It was structured last May by Swiss Re and Goldman Sachs and managed by Nephila Capital, a Bermuda-based investment fund specialising in insurance risks.
"We would like to manage more of these (CDO) vehicles in future. But frankly, the biggest hurdle to us doing another one is not reinsurance market pricing, but capital markets pricing," said Barney Schauble, a partner at Nephila Capital.
"The CDO market is gigantically dislocated, there's a lot of concern about structured products generally and many buyers have put their expansion plans on hold," said Schauble.
An actively managed portfolio of a variety of catastrophe risks, the CDO issue was divided into five tranches, allowing investors the option to invest in a variety of securities to suit their risk appetite, with the upper tiers being investment-grade.
The deal's multi-tranche structure is an important step in the market's development because it opens the door to disaster risk for investors who only tend to buy investment-grade securities, such as life insurers and pension funds.
Even if a tough credit market presents hurdles to cat bond CDOs in the short term, however, market players say the sector is now on a firm footing.
"For a long time the question was 'Is this a market that will stay around?'", said Schauble.
"That question's been answered. The question now is 'How big does the market become?'"
Editing by Jason Neely, guardian.co.uk
Click here for full article
Catastrophe bonds tempting yield seekers
ZURICH -(Dow Jones)- Swiss Reinsurance Co (RUKN.VX) Tuesday placed a EUR200 million catastrophe bond for French financial firm Groupama SA, drawing interest from a broad range of investors who are on the lookout for high-yielding instruments that are unaffected by the current credit crisis.
Catastrophe bonds are securitized insurance contracts that allow an issuer, usually an insurance or a reinsurance company, to protect itself against costly risks such as earthquakes or wind storms.
Holders, which range from hedge funds to pension funds, are compensated with high interest yields because they risk losing their entire holding in the event of a disaster.
Swiss Re said the three-year bond, called Green Valley, was rated double-B-plus and was oversubscribed as hedge funds and money managers were attracted by the paper's coupon at 360 basis points above the Euribor rate, which currently stands 4.616%.
The bond, which was structured and placed by Swiss Re's Capital Markets unit, will protect Groupama against heavy wind storms in France.
In Europe, wind storms often wreak havoc during the winter months. In 2007, wind storm Kyrill, which registered wind speeds of up to 190 kilometers an hour, caused insured losses of almost $6 billion, according to Swiss Re.
"We have participated in this issue and bought a tranche of about EUR18 million," said Michael Stahel, portfolio manager at private bank Clariden Leu in Zurich. "It's an attractive issue with a good yield."
Clariden Leu is among the leading European fund managers for catastrophe bonds. The bank has exclusive catastrophe bond funds that currently total about $700 million and are set to grow further in the years ahead as investors are getting more familiar with these instruments.
Catastrophe bonds were developed in the mid-1990s when insurers and reinsurers sought new ways to protect themselves in the aftermath of Hurricane Andrew in 1992, which triggered several insolvencies in the insurance sector.
The bonds, and other so-called insurance-linked securities amid which firms structure insurance contacts into tradable instruments, were constructed to allow insurers and insurers to protect their balance sheets in the case of huge claims.
Rather than taking the risk on their own balance sheet, which is key to an insurer's financial well-being, companies transferred peak risks into the broader financial market which can better digest them.
In the aftermath of the Sept. 11 attacks in 2001 and Hurricane Katrina in 2005, most insurers, albeit posting losses, stayed in business as they profited from these new instruments. Zurich Financial Services AG (ZURN.VX) even posted a profit as it benefitted from a catastrophe bond.
Besides helping insurance firms to keep their balance sheet intact, the high-yielding bonds also allow investors to spread their risks.
"Catastrophe bonds are a very interesting alternative investment because they aren't related to the financial market," Clariden Leu's Stahel said. "The risk is linked to a catastrophe event and not to the financial market as such."
While bonds have been under pressure in the wake of the current credit market crisis, catastrophe bonds have fared well recently and have remained unaffected by market calamities.
For example, Clariden Leu's U.S. dollar denominated cat bond fund produced a monthly return of 1.14% in September, followed by a similarly good performance in October and November when the credit crisis hit bonds elsewhere.
"This is certainly drawing investors to include catastrophe bonds as a portion of their portfolio," said Stahel.
Swiss Re, which has been among the frontrunners in this market expects catastrophe bond issues to rise further in the future as part of an overall trend in the industry to securitize insurance risks.
The company said that in 2007 catastrophe bond issues totaled $13.7 billion. This was up more than 35% from the $10.1 billion in 2006.
By Goran Mijuk
goran.mijuk@dowjones.com
Click here for source
Risk management solutions comments on French windstorm securitisation
Risk Management Solutions gave details of the recent analysis it conducted for a securitization of windstorm risk in France.
The securities were issued through Green Valley Ltd., a special purpose vehicle (SPV), and provide €200 million ($298 million) of collateralized cover over three years for Swiss Re on behalf of Groupama S.A., as part of a program structured and placed by Swiss Re Capital Markets [See IJ web site - www.insurancejournal.com/news/international/2008/01/08/86200.htm].
RMS explained that the program is triggered by a parametric index it designed that is based on recorded wind speeds at various locations. "This deal illustrates how the RMS parametric solution has been tailored to cover a unique portfolio with significant agricultural exposure to windstorm risk," commented Fathia Grandjean, Director at RMS.
"Investors and sponsors continue to show interest in transparent, straightforward parametric risk-transfer solutions," added Peter Nakada, managing director of RMS Consulting. "We look forward to bringing more new and exciting solutions like this to the market this year."
RMS also noted that the "deal is the largest ever placement of French windstorm risk of its kind offered in the insurance-linked securities market."
Click here for source
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