|Title:||United States historical catastrophe bond issuance for property and casualty related risks in dollars and percent change for 1997 to 2011|
Start of full article - but without data
P&C Related Risks
% Change Amount from Prior Year ($ million) Year
2011 X,XXX.X X% 2010 X,XXX.X XX.X% 2009 X,XXX.X XX.X% 2008 X,XXX.X -XX.X% 2007 X,XXX.X XX.X% 2006 X,XXX.X XXX.X% 2005 X,XXX.X XX.X% 2004 X,XXX.X -XX.X% 2003 X,XXX.X XX.X% 2002 X,XXX.X XX.X% 2001 XXX.X -XX.X% 2000 X,XXX.X XX.X% 1999 XXX.X XX.X% 1998 XXX.X XX.X% 1997 XXX.X n.a Average XX.X%
Source: A.Best Co.
Catastrophe-bond issuers appear to be poised for their second-biggest year ever as the industry recovers from the shock of the financial crisis in 2008 and is undeterred by numerous and costly natural catastrophes last year.
Five cat bonds were issued through mid-February, the most during a year's first two months in five years, according to A.M. Best Co. data. They represent $XXX million in coverage closed and pending, also a five-year high. Since 2007, when the industry issued $X.XX billion of cat bonds for the full year, the most bonds issued during the first two months in a year was only two.
"This year's early increases may be due to tightness [higher prices] in the traditional reinsurance market, ample cash in the hands of insurance-linked-securities dedicated funds that is ready to be deployed, and diversity in the perils of the bonds issued so far," said Asha Attoh-Okine, managing senior financial analyst of insurance-linked securities at A.M. Best Co. So far, issued bonds cover earthquakes in California and Japan, hurricanes in the United States and windstorms in Europe. "In fact, almost all the major peak exposures or perils are represented in issuances of the first two months," he said.
Not Correlated to Markets
Since their introduction in the mid-1990s, cat bonds have attracted investor attention because they are not correlated to stocks, bonds or other asset classes, and because they offer high returns, albeit at the risk of losing the full amount invested. Returns on the bonds are made up of a reference benchmark rate--generally the U.S. Treasury money market--plus a spread. Depending on the probability of first-dollar loss, known as the attachment probability, spreads often range from XXX to X,XXX basis points, Attoh-Okine said, and some offer returns as high as X,XXX basis points.
In order to break the 2007 issuance record of $X.XX billion, the coverage amounts of cat bonds this year would have to grow by almost XX% from last year. Attoh-Okine said such growth would be a "gigantic step," but would not be unprecedented.
He said amounts are likely to exceed $X billion, the second-highest level since $X.XX billion worth was issued in 2006.
Last year, the industry issued $X.XX billion.
Achieving a new issuance record this year would likely be the result of a continuous tightening of the traditional reinsurance market versus the relative costs of issuing cat bonds, along with an increase in the number of peak exposures apart from U.S. wind, Attoh-Okine said.
"The availability of other insurance-linked-securities alternatives, including industry loss warranties, collateralized reinsurance vehicles and sidecars, will also compete with cat bonds for investors' capital," he said. "Of course, a repeat of the number and dollar amount of last year's catastrophe losses during this year will alter the dynamics of the dollar amount of cat bonds to be issued."
The uptick in the second half of last year and early this year is due to increasing education in the marketplace and investors searching for opportunities to get into the insurance space, said David Lalonde of catastrophe modeler AIR Worldwide. "Cat bonds have proven themselves resilient through the myriad economic setbacks we've had, so they've been a fairly good, stable source of potential investments," said Lalonde, the senior vice president of consulting and client services.
Another factor is that as investors build up their cat-bond portfolios, they fear a single event causing loss to multiple bonds in their portfolio, Lalonde said. "And so they look to diversify not just in terms of new perils, but in different structures and ways of taking risks." He said that in 2012, he expects to see more aggregate deals, where the investor is not exposed to just the risk of a single occurrence, but a bond that is triggered off a level of loss determined by the aggregation of multiple losses from multiple events.
"And 2011 provided a lot of aggregation of losses, so I think there will be a focus on getting cover for aggregate losses, and some of that will turn to the capital markets," he said.
Ups and Downs
The worst year-to-year decline in cat bond issuance was in 2008, when the total was $X.X billion. Attoh-Okine said that was due to the same level of uncertainty that the general financial market faced.
But what did not help matters was the trigger of four cat bonds as a result of the default of Lehman Brothers Special Financing Unit (a subsidiary of bankrupted Lehman Brothers).
The unit was a total-return swap counterparty in the transaction.
"The cat bond market was at a crossroad in finding a suitable collateral structure to avoid a similar situation during the second half of 2008," said Attoh-Okine. That occurrence led to greater use of U.S. Treasury money market funds as the collateral instrument, he said.
Last year's catastrophes added to the short list of cat bonds that have been triggered. The bonds include Mariah Re 2010-X and 2010-X, both due to U.S. tornadoes last year; and Vega Capital 2010 and Muteki Ltd., both due to the March 2011 Tohoku earthquake in Japan.
In 2008, Nelson Re Class G triggered due to Hurricane Ike, and in 2005, Kamp Re triggered due to Hurricane Katrina. The Mariah bonds paid out $XXX million each, XXX'% of their capital, while Muteki paid $XXX million, also a full payout.
However, these defaulted cat bonds represented only a small percentage of the risk capital outstanding at the time the trigger events occurred, Attoh-Okine said.
Typically, there is about a X% to X% probability that a cat bond will be triggered within a region, though some bonds are more risky, Lalonde said.
Work of Modelers
As a modeling agent, AIR Worldwide provides cat-bond risk analysis. "Our role is to provide effective information to all parties," said Lalonde. The issuer benefits from the protection and a secure source of capital, he said, while investors benefit from the diversification this type of risk provides, and rating agencies use the risk modeling for their analyses. Nearly all cat bonds are rated below investment grade, said Attoh-Okine.
Modeling companies also provide investors with tools to manage their portfolios of risk. "That helps them to understand the correlation between the deal at hand and other deals they may have in their portfolio," Lalonde said.
AIR Worldwide modeled XX bonds last year and the first four of 2012. Cat bonds complement reinsurance transactions, according to Lalonde.
The firm models hurricanes, earthquakes, typhoons, severe thunderstorms, tropical cyclones, wildfires, flood and terrorism. The models consider the impact to structures and contents, business interruption, crops, employees (through workers' compensation), and other assets like offshore oil platforms. They address all major perils, including those that are infrequent but can do a lot of damage, Lalonde said.
Cat bond ratings impact the spread earned by investors, AttohOkine said. Higher ratings are assigned when the probability of first-dollar loss is remote, and lower ratings are assigned when the probability is high, he said.
If there is a change in the perceived risk, the rating on a bond can be changed accordingly.
A.M. Best also considers structural, regulatory, legal and third-party documents; the perils included in the transaction; collateral information; and the risk period and other qualitative factors, Attoh-Okine said.
Investors comprise about XX dedicated insurance-linked securities funds, which include pension funds, investment banks, hedge funds and insurers/reinsurers.
New Bermuda License Category
As of Dec. XX, Bermuda had XX licensed special-purpose insurers that issue cat bonds. Shelby Weldon, director of insurance at the Bermuda Monetary Authority, said Bermuda created a special licensing category for them in 2010. Before then, deals would have been done through what the industry calls a "sidecar," a fully funded type of limited-life entity attaching to the insurance market, he said.