Liberty Mutual: Insurance-linked securities market offered more value than traditional reinsurance


Aon Benfield Securities recently published Q2 insurance-linked securities and catastrophe bond market report included an interview with Elaine Caprio Brady, Vice President and Manager of Ceded Reinsurance at Liberty Mutual Insurance. The interview discusses Liberty Mutual’s use of the insurance-linked securities market as they issued their most recent catastrophe bond, Mystic Re III Ltd. (Series 2012-1), in March of this year.

When considering their latest cat bond, Liberty Mutual were looking for a number of factors which the cat bond market could offer them. The cover had to be sustainable, providing multi-year protection across the U.S. and it had to be easily embedded into their excess of loss reinsurance program. One of the benefits of cat bonds is that they can be customised to fit alongside traditional and collateralized reinsurance covers so that the sponsor can target the layers of protection which can be most cost effectively transferred to the capital markets. Elaine Caprio Brady also cites the diversification in sources of reinsurance cover that the Mystic Re III deal offers Liberty Mutual.

Liberty Mutual are a repeat sponsor of cat bonds, but prior to Mystic Re III they hadn’t issued a cat bond for three years, since their Mystic Re II Ltd. (Series 2009-1) came to market in March 2009. When asked why they had chosen to return to the cat bond market at this time, Elaine Caprio Brady said; “This year, we felt that the traditional reinsurance market offered less value than in previous years, so we returned to the ILS market.” That’s very interesting as many other sponsors have cited the attractiveness of the cat bond market and the value it offers in 2012. Further evidence of the increasing competition that cat bonds are offering versus traditional reinsurance.

Mystic Re III marked a departure from an industry loss based cat bond which Liberty Mutual’s deals were more typically structured as, moving away from a PCS trigger to an indemnity trigger for the first time. Elaine Caprio Brady commented that this allowed them to better reflect their true exposures and fit the cat bond cover more tightly into their overall reinsurance program. She continued to say that the fact that Mystic Re III affords them indemnity cover makes it more important to them than previous cat bonds and will encourage them to continue to explore cat bond opportunities.

Elaine Caprio Brady has some interesting thoughts on what could help the ILS market to grow. She feels that if the market could offer the same types of cover as traditional reinsurance, including reinstatements and indemnity cover for complex commercial business it would be attractive. She also mentions casualty cover as a class of risk that would benefit from being included in the ILS market. She also mentions transaction fee’s and the claims collection process and says it would benefit the market if they could be more effectively managed or even capped. That’s where dedicated cat bond and ILS issuance platforms could become more prevalent in the market we believe.

It’s encouraging to hear that sponsors like Liberty Mutual Insurance remain pleased with the value they can achieve in the cat bond market. The comments made in the interview are all valid and could point to ways the market could achieve further growth and diversification. The cat bond and ILS market will continue to exist in its current form but there is room for more flexible, affordable and perhaps smaller transactional issuance to be offered to repeat sponsors willing to commit to the market. The appetite from investors for these deals is certainly sufficient.

You can access the full report from Aon Benfield Securities and read the full interview via their press release here.

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