Moody’s positive on contingent capital facilities, expects more

Ratings agency Moody’s has published an article discussing the announcement from French reinsurer SCOR about the triggering of their catastrophe linked contingent capital facility. Just over a week ago SCOR announced that the facility had successfully been triggered and would pay them €75m due to their rising catastrophe losses.

Moody’s say that they see the triggering of the contingent capital facility as credit positive, something that is particularly important for both insurers and reinsurers in Europe with the impending Solvency II capital adequacy rules approaching. They said that the equity placement that the facility mandates, strengthens SCOR’s balance sheet with ‘high-quality capital in advance of the 2011 U.S. hurricane and EU windstorm season’. They continue to say that the contingent capital payout benefits SCOR by providing ‘the strongest form of capital at a time when such capital may be depleted, or in short supply from the market.’

Positive statements from a ratings agency, in fact reminiscent of the kind of sentiment ratings agencies used to apply to other types of just-in-time capital such as catastrophe bonds. The benefits of an instrument such as contingent capital (or indeed catastrophe bonds) are often in the predictability of the triggers, the timeliness of these instruments coming into play and the speed of payout, when compared to other sources of reinsurance or retro cover. It makes a lot of sense for re/insurers to utilise contingent capital arrangements, particularly when they are linked to their loss experience, as yet another alternative part of their risk transfer mix.

Moody’s finish their article by saying that they anticipate that other insurers and reinsurers will consider creating similar facilities that strengthen their balance sheet following losses. We agree, it is beginning to look like some of the impending regulations will push re/insurers to focus even more on shoring up their capital with various forms of post-event financing (particularly where they can tap into the capital markets) and contingent capital along with cat bonds are likely to play a big part in that.

Allianz also announced a €500m contingent capital facility within the last week.