"As a firm globally we’ve probably done 80 or so transactions since the market’s inception. In Europe we have probably done five over the past 12 months – if that is an indicator of [the future rate of] activity I’m pretty excited," says Elizabeth Gilbert, managing director and head of the insurance financing group at Goldman Sachs.
Evidence that this sector is finally taking off is provided by an uptick in the volume of issuance, the variety of issuers and the diversity of investors that are starting to be interested in the asset class. In fact the pure volume of issuance to have taken place in the first half of this year is more than in the whole of 2006.
"Over the past 10 years, the catastrophe bond market has staggered from zero to around the $8 billion to $10 billion mark," says Tom Keatinge, head of insurance debt capital markets at JPMorgan. "This could easily be a $100 billion a year market, if you consider the size of the underlying risks," he argues.
If Keatinge’s hopes are met it would mean that insurance-linked securitization would no longer be a relative backwater, with risk transfer in the insurance sector largely the preserve of the largest reinsurers.
At present property and casualty insurers constitute the main source of ILS volume. Much of this has been the big US primary insurers, institutions doing cat bonds with P&C risk, which has started to crank up volumes.
According to Gilbert, there are two key reasons why European insurers are increasingly looking at the capital markets. "One is economic capital – we are moving in that direction. Insurers are incentivized to look at risk transfer methods and having the capital markets as an alternative to reinsurers can only be a good thing. I think that insurers are taking note of what is happening globally, particularly in the US. They are looking at the technology a bit harder, in terms of making an active decision to do it or not do it. Whereas previously I think it was easier to for them to ignore what was going on."
Of European insurers using ILS for risk transfer, Axa stands out from the crowd. It has long had a sophisticated approach to evaluating available and required economic capital. It is also technically able and appears willing to test the boundaries of the market and regulation. It pushed ahead with its first securitization of a motor insurance portfolio 18 months ago despite apparently not having explicit approval from domestic authorities that it would be able to obtain capital relief for the trade. Last month it printed a pan-European motor insurance deal for €200 million via Natexis.
A subsidiary entity, Axa Cessions, issued $440.5 million equivalent of mortality risk in November 2006, via Lehman, the first primary insurer to sell mortality cat bonds and the first euro-denominated deal from this specific asset class.
Natural disaster
Much of the cat risk transferred via the capital markets has been cover for natural disaster. Bermudian P&C and reinsurer Catlin was the first to issue a publicly rated deal (Bay Haven) in CDO form late last year. The deal was distributed by ABN Amro, with the close involvement of Guy Carpenter, the broker that is part of insurance group Marsh McLennan.
There was a second natural cat risk deal ABN distributed for Guy Carpenter. Recently, Brit Insurance brought a deal called Fremantle Limited. The CDO provides Brit with up to $200 million in the event of multiple qualifying natural catastrophes – including wind, earthquake and hurricanes – during the next three years. It virtually replicates the structure used on Catlin.
In a sign of the importance the industry places on understanding rating agency thinking in this fast-developing market, both Fitch and Standard & Poor’s have had senior officials poached recently. Fitch’s Franz Lathuillerie is joining HSBC (see People moves: HSBC raids Nomura and others, Euromoney, August 2007), and Jonathan Spry has joined Guy Carpenter from Standard & Poor’s, where he was head of the ILS team.
Guy Carpenter is also planning to develop a capital market franchise in this field. Spry says: "I will be working on credit solutions, insurance securitization, collateralized reinsurance contracts and other alternative reinsurance solutions, including innovative contingent capital, structured risk management solutions and investment strategies for European clients."
Spry says that Guy Carpenter wants to move beyond pure advisory and broking to insurers. It wants to be able to directly structure and execute these types of transactions. It is investing in distribution and execution and will use its sister company, MMC Securities.