Leadenhall achieves investment grade rating for private cat bonds

London headquartered insurance and reinsurance linked securities investment manager Leadenhall Capital Partners has achieved an investment grade rating for two private catastrophe bonds.

Leadenhall’s two private cat bonds received a BBB+ rating from Standard & Poor’s, which the ILS manager said demonstrates “the London-based ILS arm of MS Amlin has a portfolio that is capitalised to an investment grade level.”

It’s a big step forwards for private catastrophe bonds, as for some large institutional investors a rating of investment grade is mandated for assets they allocate capital to.

Luca Albertini, CEO of Leadenhall, explained; “One of the challenges for the convergence market is to find a way to come up with an equivalent to a credit rating for a Cat portfolio based on its level of capitalisation. Whilst rating the reinsurance obligations of a cell could prove challenging, S&P’s Cat bond criteria made it easier to come up with a comparison.”

The two private catastrophe bond transactions saw the ILS manager covering a small layer of the portfolio of each of the segregated cells used for its Value and Diversified ILS funds, which Leadenhall manages.

Leadenhall invests in segregated cells which accept reinsurance risk, effectively its collateralised reinsurance contracts, some of which are then underwritten by MS Amlin.

The private cat bonds will provide reinsurance protection from an annual exceedance probability (AEP) level of 1 in 2,000 year’s, Leadenhall said, effectively the attachment point.

Collateral has been provided to meet claims up to the attachment point of the private cat bonds.  Additionally, some of the limit written above the cat bonds’ exhaustion level will also be collateralised at the start of the transaction.

It’s an innovative way for an ILS manager to underwrite and collateralise reinsurance contracts, with the resulting asset being an investment grade security which provides a retrocession of sorts, but also resolves the issue of transforming a private reinsurance contract into a rated cat bond note.

James Few, MS Amlin’s Global Managing Director, Reinsurance, said; “This innovative move illustrates the diversity and skill we have within MS Amlin’s Reinsurance business, it will help MS Amlin appeal to a broader set of clients in our global markets.”

For Leadenhall, the benefits of achieving a rated investment asset and the method in which it has structured the transaction provides diversification of the underlying portfolio.

The covered portfolio consists of a large volume of small tranches of MS Amlin fronted reinsurance deals.

Each of these has been individually accepted by Horseshoe Re II, one of the Horseshoe Group’s vehicles that facilitate ILS and collateralise reinsurance, as the reinsurer and by Leadenhall as the investor.

Additionally, the make-up of the portfolio means that exhaustion of the fund’s collateral is particularly unlikely, on a modelled basis, Leadenhall said.

It’s a fascinating development in the world of catastrophe bonds and this method could well be emulated by other ILS managers, for whom the additional flexibility and the resulting investment grade cat bond asset could prove valuable.