Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

2012 catastrophe bonds indicate gradual expansion of the markets scope


The mix of perils and the underlying structure of some recent catastrophe bond transactions point to a gradual expansion of the cat bond markets scope and offer investors new sources of diversification. The inclusion of new perils within some cat bonds while other deals focus on a specific peril and geographic location, along with new structures and triggers, all present investors with new opportunities for diversification. This seems to show that the market is more comfortable bringing new risks and structures to market and are confident in investors increased understanding of the market and their acceptance of them.

Swiss insurance-linked securities investment manager Plenum Investments mentioned this trend where the market scope is widening in their latest monthly insight. Plenum said that although many recent deals have included the typical cat bond perils of U.S. earthquake and U.S. hurricane they have noticed a tendency for sponsors to also include other perils or to expand the geographic scope of a deal. Each time something different, new or downright innovative is added to a cat bond deal it expands the scope of the market and offers investors a new or improved source of diversification.

So, spurred on by Plenum Investments positive sentiments on this trend we thought it worth taking a look at some of the deals which came to market in 2012 to highlight some of the more interesting new additions to cat bond market scope and coverage, starting with the most recent deal.

Everglades Re Ltd. – This transaction, while innovative enough in that it is the first cat bond issued by Florida Citizens, is providing cover for Florida hurricane risks. Not that unusual in itself but Citizens are just seeking coverage for their coastal account which means this deal covers a smaller geographic area than most Florida hurricane cat bonds, therefore allowing for a level of diversification for investors.

Pelican Re Ltd. – Solely covering Louisiana hurricane risks, so offering some diversification for investors again.

Akibare II Ltd. – This deal includes both Japan typhoon and also flooding caused by wind storms in Japan. The previous Akibare Ltd. deal was solely Japan wind so again this deal offers a level of diversification.

Blue Danube Ltd. – This deal cleverly added Canada earthquake, Caribbean hurricane and Mexico hurricane into its mix. The hurricane risks are on a clash basis we understand meaning that losses incurred from a hurricane in the Caribbean which then moved over the U.S. and caused losses could trigger it. Blue Danube also used a new trigger design called a Modelled Industry Trigger Transaction (MITT). A clever structure and also another deal offering a new level of diversification.

Combine Re Ltd. – An indemnity based cat bond deal with two underlying beneficiaries and therefore two sets of losses to combine. One beneficiary has North Carolina risk exposure only, while the other is exposed across most of the U.S. but excluding Florida and California. It also included U.S. severe thunderstorm in the mix of perils. A clever structure which will allow investors another new type of diversification for their portfolios.

East Lane Re V Ltd. – Included U.S. severe thunderstorm alongside U.S. hurricane risks. Severe thunderstorm is still not a big percentage of the outstanding cat bond market (especially after the Mariah Re defaults) so offers some diversification for investors.

Kibou Ltd. – The first pure Japanese earthquake cat bond since 2008, a peril that was shrinking in the market and a much needed diversifier.

Catastrophe bond investors are sophisticated and need diversification opportunities to not only help them balance their portfolios but also to allow them to put more capital into the market. If they can’t acquire diversified positions then they will stop deploying capital for fear of becoming over exposed to one peril or geographic location. By mixing things up and offering these new perils, geographies and structures, sponsors are helping to keep the market healthy and expanding its scope. It’s a trend we hope to see continue this year.

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