A few weeks ago in January we wrote that ratings agency Standard & Poor’s had placed the notes issued by Vitality Re Ltd. and Vitality Re II Ltd. on CreditWatch with positive implications. The two medical benefit ratio insurance-linked securities deals sponsored by Aetna had experienced positive claims trends and S&P wrote that they could be upgraded once the new modelling results were received. As they expected, the modelling results lowered the probability of attachment on the deals and as a result some tranches have been upgraded.

Vitality Re Ltd., the first of these unique catastrophe bond type transactions which provide Aetna with cover for health insurance risks linked to medical benefit claims ratios, was issued in December 2010 and secured Aetna $150m of collateralized reinsurance cover. Vitality Re II Ltd., which saw Aetna return to the ILS market to increase the coverage provided by the Vitality Re series of deals by another $150m, was issued in April 2011. In recent weeks Aetna have also completed a third transaction with the $150m Vitality Re III Ltd. coming to market. So at this stage Aetna have $450m of collateralized reinsurance cover for increases in health insurance claims provided by these Vitality Re cat bond type transactions.

S&P have now received updated model results from Milliman Inc. (who provide risk modelling services for these deals) based on the methodology used for the latest Vitality Re III transaction. The modelling confirmed the improved claims experience on the covered business that Aetna subsidiary Health Re ceded to Vitality Re and Vitality Re II. As a result of the improved claims experience, which results in a lowered probability of attachment, S&P raised their rating on Vitality Re Ltd.’s Series 2010-1 Class A notes to ‘BBB+’ from ‘BBB-’, and its rating on Vitality Re II Ltd.’s Series 2011-1 Class A notes to ‘BBB+’ from ‘BBB’. At the same time, S&P affirmed their ‘BB+’ rating on Vitality Re II Ltd.’s Series 2011-1 Class B notes.

S&P says that the medical benefit ratio (MBR) attachment for the Series 2010-1 Class A notes is 104%, and 105% for the Series 2011-1 Class A notes. When they calculate the updated MBR for the upcoming resets for the two deals they expect the positive claims trends to lower the probability of attachment. They had weighted the initial MBR’s for the first two Vitality deals more heavily based on the 2009 claims experience and MBR which was less favourable than the MBR experienced in 2010 and the first nine months of 2011.

The MBR attachment point for the Series 2011-1 Class B notes is 100%. S&P says that although the updated probability of attachment is lower than before it is still within a ‘BB+’ rating range and so this tranche of notes was not upgraded.

The ratings are based on the probability of attchment in each year, but slightly adjusted to allow for the difference between actual MBR claims ratios and the modelled results. For this they use stress testing scenarios within Milliman’s model to identify strengths and weaknesses and adjust the probability of attachment accordingly.

Investors in the Vitality Re transactions must be pleased with the lower probability of attachment that has been identified with these notes as it suggests a safer and less risky investment.

S&P upgrades Vitality Re and Vitality Re II on positive claims trends is a post from: www.Artemis.bm
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Hedge fund backed Bermuda reinsurer Third Point Reinsurance Company have published a press release announcing further operational milestones as the start-up company gets down to business. Third Point Re was launched with the backing of New York based hedge fund Third Point LLC and raised over $750m of capital ($785m apparently) which they’re now putting to work. They announced some senior hires recently and have now added to them with more core team members.

The press release published yesterday says that since their launch in January they have underwritten multiple new reinsurance treaties. The slightly unusual January renewals, particularly on the retro side, will have helped Third Point Re who started writing business in January and so could have missed a lot of the renewal season had it been a normal market environment.

Chairman and CEO John Berger is directly responsible for underwriting decisions and is also Chief Underwriting Officer. The team which includes the two ex-Aon Benfield execs CFO/COO Robert Bredahl and EVP of Underwriting Daniel Malloy are now joined by additional hires EVP of Underwriting Anthony Urban; Chief Actuary and Chief Risk Officer Michael McKnight; EVP, General Counsel and Secretary Tonya Marshall; SVP of Operations Shane Haverstick; and Chief Administrative Officer Vanessa O’Flynn.

Third Point Re’s investment portfolio is managed by Third Point LLC and the strategy will be event-driven and value oriented.

The press release also details some of the backers who helped finance and set up Third Point Re. They include three founding private equity investors Kelso, Pinebrook and Dowling Capital. Together, the founding private equity investors placed $390m into the company. Third Point LLC CEO Daniel S. Loeb also invested $75m in Third Point Re’s initial capitalization.

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Almost everyone we speak to is bullish about the prospects for the catastrophe bond and insurance-linked securities market over the year ahead. Most people predict an issuance volume of at least equal to 2011, but some are predicting much higher. One of those people predicting a year of growth is Christophe Fritsch, head of insurance-linked securities at Axa Investment Managers, who in an interview with Bloomberg said he felt that cat bond issuance volume could grow by 30% to hit $6 billion in 2012.

Mr. Fritsch said that he expected more new sponsors to continue coming to market, while insurers sought to use cat bonds to raise capital after a heavy year of losses in 2011. So this increased demand should help to ensure a good year for issuance.

At the moment and increased demand for cover is able to be met by an increased demand from investors as well so increased cat bond issuance may help new participants enter the investment side of the market.

Let us know what you think 2012 will bring in the way of volume of cat bond and ILS deals issued by voting in our poll.

Catastrophe bond issuance could hit $6 billion in 2012: Axa is a post from: www.Artemis.bm
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A couple of weeks ago we wrote about renewable energy risk analysis firm 3TIER® who published a wind performance map for the U.S. in 2011 which showed that generally wind speeds across the U.S. were above average across the year. Now 3Tier have published a wind performance map for Europe and again it shows that there was a general departure from the norm in average wind speeds across the continent.

The wind performance map for Europe shows that generally wind speeds were 5-10% above normal in northern Europe and up to 10% below normal in southern Europe. They’ve also published quarterly maps which show the change throughout the year, which is quite pronounced in Europe.

This helps to show the potential for weather hedging, as it demonstrates where wind speeds could have been hedged with derivatives. This kind of data could be used for performance contracts related to wind energy plants, or any other industry affected by wind speeds. Given the departure from average 2011 could have been a good year to have a wind speed weather hedge in place.

Read the full press release from 3Tier.

2011 European wind variance from average

Wind performance map of Europe shows variability of weather, value of hedging is a post from: www.Artemis.bm
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In the fourth of our prediction pieces, where we ask a leading participant in the insurance-linked securities, catastrophe bond and reinsurance convergence sectors to give us their opinion on how these sectors will evolve in 2012, we spoke with Bill Dubinsky, Managing Director, Willis Capital Markets & Advisory, the capital markets arm of global insurance broker Willis Group. We asked Bill for his thoughts on where the market was headed in 2012.

His response follows below.

We see two key likely trends in 2012. First, specialist investors continue to gather assets to deploy in insurance event risk. The European sovereign debt issues may slow this trend temporarily but it persists. This bodes well for the broader convergence market including collateralized reinsurance, insurance-linked securities, ILWs and related products. More capital generally translates to more deals.

How this incremental capacity gets deployed is less clear. For example, 2011 saw a steady trend towards higher-risk and higher return deals within the cat bond market consistent with the investment mandates for the specialist investors. This leads to the second key trend: more and more of the investors (and sponsors) are agnostic to form between different convergent products. For example, an investor may like the liquidity of cat bonds but may also like the returns available on a collateralized retro placement. Sponsors like the liquidity discount and full syndication possible with cat bonds but they also like the speed to market of some of the other products. Relative attractiveness shifts quickly. While terms and conditions matter too; fundamentally relative pricing determines how convergence capital gets deployed.

Outside of cat risk and more generally, we continue to see the potential for innovation: new perils, new structures for old perils, and different forms of risk taking. Evolutionary innovation has the potential to marginally increase the size of the market as capital remains on the sidelines waiting for appropriate relative value opportunities. Substantial innovation, however, could make for dramatic growth. Even without innovation, we believe the convergence sector will perform well in 2012, but with it we could see a banner year.

End.

Our thanks go to Bill Dubinsky for his time and sharing his insights with us.

Predictions for 2012: Bill Dubinsky, Willis Capital Markets & Advisory is a post from: www.Artemis.bm
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Specialty insurance company Assurant Inc. have published a press release on the completion of their Ibis Re II Ltd. Series 2012-1 catastrophe bond this week. It’s Assurant’s third cat bond deal under an Ibis Re SPV. The latest deal which secured Assurant $130m of collateralized reinsurance coverage via a cat bond will replace some of the coverage from the $150m 2009 Ibis Re Ltd. cat bond which matures in May 2012.

Certain subsidiaries of Assurant entered into $130m of reinsurance agreements with Cayman Islands domiciled Ibis Re II Ltd. which financed the agreements through the sale of catastrophe bond notes to qualified institutional buyers. Assurant says that the coverage from Ibis Re II complements their traditional reinsurance and provides broad protection from catastrophic storm activity.

Ibis Re II provides Assurant subsidiaries with two layers of coverage against losses from individual hurricane events in Hawaii, Puerto Rico and along the Gulf and Eastern Coasts of the U.S. The deal upsized before close from $100m to $130m.

“We are pleased to have successfully placed this property catastrophe reinsurance coverage, which supplements Assurant’s Catastrophe Reinsurance Program,” said Gene Mergelmeyer, president and CEO of Assurant Specialty Property. “Guided by a long-term perspective and a strong risk management strategy, Assurant continually works to further protect our clients and shareholders from the risk created by catastrophic storm activity.”

Assurant on the purchase of $130m of reinsurance through Ibis Re II Ltd. cat bond is a post from: www.Artemis.bm
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The industry loss warranty (ILW) market is on the up in 2012 according to a report published by Willis Re, the reinsurance broking arm of Willis Group. Loss activity experienced during 2011 has driven buyers to seek protection and ILW’s are one area set to benefit, with Willis Re predicting growth of as much as 25% in ILW volume during 2012. The result of this growth will be an ILW market back at the peaks in trading volume and pricing last seen after hurricanes Katrina and Wilma in the hard market of 2006/7.

Willis Re estimate that the ILW market reached a trading volume of $6 billion during 2011. For 2012, given the ILW activity which Willis Re estimate at between $2.75 billion and $3.25 billion seen at the 1st January renewals, they predict that an annual trading volume of between $6.5 billion and $7.5 billion of notional limit should be expected in 2012.

Average rate on line (RoL) or pricing is expected to be up 20% during 2012, given the significant loss experience of the reinsurance market last year. Willis Re predict an average RoL of 15.5%, below the highs of 17.5% average seen in 2007, but still very healthy for the ILW market and they say 2012 should be a strong year. Price increases observed during the 1st January renewals were much higher on loss-affected contracts and peril affected regions, with some contracts experiencing 30%-50% price increases. Non loss-affected contracts climbed 10%-20% on a year-on-year basis.

Henry Kingham, Executive Director, Willis Re Specialty and co-author of the Q1 2012 ILW update explained; “In the second half of 2011, there was heightened speculation on availability and pricing of retro capacity for the 2012 season, which — conversely to the late renewal in the traditional market — pushed ILW protection buyers into the market early to seek cover. However, once the ultimate net loss (UNL) renewal season began with gusto, the ILW market slowed slightly as clients and markets concentrated on renewing their traditional book of business. Despite the hiatus, at the time of going to press, the majority of 1 January UNL renewals had been put to bed and we have seen a significant uptick in ILW trading.”

The report discusses the types of capital provider likely to be involved in the ILW market during 2012 and predicts that as much as 75% of the estimated $6.5 billion to $7.5 billion of ILW capacity will come from capital market players, including those using a fronting reinsurer to support collateralised covers.

On the factors which affect ILW buying demand, pricing, capacity and supply, Kingham said; “We saw significant pricing volatility on contracts at 1 January. This was caused by a record tally of natural catastrophe losses in 2011, vendor model changes and shifts in capacity caused by supply and demand fluctuations. It is difficult to distinguish between the impact of risk modeller RMS’ Version 11 US wind model and the wider impact of 2011 losses on ILW buying demand and capacity supply. However, we observe generally that loss-affected contracts experienced a 30-50 percent price increase in January and non loss-affected contracts were 10-20 percent up on a year-on-year basis.”

The report also discusses a growing appetite from protection buyers to lock in pricing with aggregate and multi-year covers, something we’ve discussed on Artemis before. Willis Re notes that locking in cover with an ILW can help retro buyers overcome scarcity in the retro markets. They also noticed heightened interest in ILW’s with aggregate trigger levels and multi-peril triggers. The trend for customised covers seems to be increasing and in some ways ILW’s are affording protection more akin to catastrophe bonds nowadays. It will be interesting to see how this trend continues.

The report from Wills Re is well worth downloading to read in full, it includes some interesting data and insight. You can download the report here.

Industry loss warranty (ILW) market headed back to hard market peaks is a post from: www.Artemis.bm
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Diversity and the hunt for diversification are key topics which regularly come up in our articles, our discussions with participants in the market and our coverage of deals and transactions in the catastrophe bond and insurance-linked securities spaces. Diversity is a factor which enables the market to grow, encourages investors to enter the market, makes transactions more attractive and enables a strong community of financial specialists to come together to bring complex risk transfer structures to market.

Reinsurer Swiss Re’s recent ILS market update, which we covered in more detail here, contained a few interesting graphs showing the diversity in perils, collateral types and triggers used in all of the outstanding cat bond and ILS transactions at the end of 2011.

The first graphic shows the perils which are currently securitized in outstanding cat bond and ILS transactions. This is the graph which we would like to see become even more diversified, through the inclusion of new types of risk in the market. An increase in types of peril and risk issued as ILS or cat bonds would help the market to grow. As you can see in the graph below, despite the market being just around $14 billion in size, it is pretty diverse with a good mix of perils involved in transactions.

Current securitized perils in outstanding cat bonds and ILS transactions

The second graphic shows the collateral types which have been used in the outstanding cat bond and ILS deals at the end of last year. Again, it’s interesting to see the mix of collateral arrangements that have been used. We’d expect the percentage of total return swaps to decrease as the market has almost totally stopped using them for collateral purposes.

Types of collateral used in outstanding ILS and cat bond transactions

The third graphic shows the types of triggers which have been used in the outstanding cat bond and ILS deals. Again, this graph shows a good level of diversity. A few years ago it had seemed that parametric type triggers would have increased in usage further than they have, but industry loss trigger remain the favourite type of trigger mechanism, particularly in cat bond transactions.

Types of triggers used in the outstanding cat bond and ILS transactions

So, what we’d really like to see at the end of 2012 is for the first graphic to become even more diverse as new types of risk come to the ILS and cat bond market. That is really the key for the ILS and cat bond markets continued growth and success. The other two graphs don’t need to become more diverse, but as long as a level of diversification continues it helps to keep the market varied and healthy. Of course the other area of diversification is geography, with the location of risks within cat bond and ILS deals also important to keep the market varied for investors.

See our recent article on how risk models and data can help the market become increasingly diverse.

Diversity in the outstanding cat bond & ILS market at year end 2011 is a post from: www.Artemis.bm
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The Chicago Mercantile Exchange (CME), which is the main location that weather futures and derivatives are traded, has experienced a significant drop in the volume of contracts traded across the exchange during 2011 when compared to the prior year. The CME has been experiencing good growth each year but 2011 saw a decline in volumes of 36% across their whole suite of weather products. It’s not all doom and gloom though as some of their niche weather contract lines saw huge growth.

Across the whole CME weather suite of products volume dropped from 459, 702 contracts traded in 2010 down to 294,905 in 2011. The majority of the decline came from the temperature linked weather derivatives and futures which are the core staple of the CME’s weather product line. The volume of temperature contracts declined from 455,702 in 2010 to 290,655 in 2011.

What’s the reason for the decline? Hard to say, there are some obvious reasons that this decline could have been so steep though. One reason is the weather experienced in 2011 and the difference to 2010. 2011 did see some significant weather extremes although we would have thought that hedging of weather risk would have become more important, although positions may have reversed from previous year.

A contact at the CME told us that there are a number of factors likely to have impacted CME weather volumes but didn’t expand (so we assume he meant the weather), but he also added that the CME has heard from industry participants that in the current economic climate some companies and investors are more risk averse to alternative investments such as weather. That’s interesting as we are not really seeing the same in the ILS and catastrophe bond space.

Despite this steep decline in temperature contracts traded on the exchange, the CME has seen significant success in some other weather product lines. The table below shows where some of these successes have been.

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So we’re assuming that the main reason for the steep decline in overall and temperature contracts traded is predominantly an effect of differing weather patterns combined with the economic climate during 2011. We’re interested in the opinions of anyone involved in the weather markets so please let us know what you think in the comments below.

CME weather volumes down in 2011 but niche contracts up significantly is a post from: www.Artemis.bm
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As we wrote yesterday, the Ibis Re II Ltd. Series 2012-1 catastrophe bond from sponsor Assurant has closed at an upsized $130m. This two tranche cat bond transaction, issued by Cayman Islands domiciled Ibis Re II, will provide sponsor Assurant with three years of U.S. hurricane cover on a per-occurrence, industry loss basis. This is Assurants third Ibis Re cat bond transaction and they have become a regular participant in the market.

The trigger for the transaction is a county-weighted industry loss index which uses the Verisk Catastrophe Index, the first transaction to use this new tool. The county-weighting should give a greater resolution of losses and more flexibility within the geographic coverage the deal affords.

In our article yesterday we revealed that the deal had upsized as the Class A tranche had grown from $70m to $100m in size. The Class B tranche remained at $30m in size. The two tranches cover different levels of industry losses, Class A has an attachment point of $1.05 billion and Class B at $610m.

The $100m of Series 2012-1 Class A notes will pay a coupon of 8.35% above money market funds to investors and was rated ‘BB-’ by Standard & Poor’s. The $30m of Class B notes, which are more risky with a lower attachment point, will pay a coupon of 13.5% above money market funds and were rated ‘B-’ by S&P.

It’s encouraging to see Assurant becoming a regular sponsor of catastrophe bonds. Ibis Re II has been set up as a programme which could allow for further issuances from the SPV if Assurant desires, so it is likely we will see another Ibis Re cat bond within the next year or so.

Ibis Re II Ltd. catastrophe bond rated and closes is a post from: www.Artemis.bm
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