The secondary market for trading in catastrophe bond and insurance-linked securities saw brisk activity throughout much of 2011. Of particular interest is the trading patterns and how the secondary market reacted to events which impacted these markets. We’ve written before about how catastrophe events and potential hurricanes have impacted secondary market confidence and thus trading volumes. Here we feature some more data from Swiss Re which shows the pattern across 2011 and also cumulative trading volumes versus prior years.

Overall, secondary market trading in 2011 saw a slightly lower volume of trades than in 2010, but higher than 2009, according to data from Swiss Re’s own ILS and cat bond trading activities. This isn’t data from the whole of the secondary market, but the patterns it shows are representative of the patterns that will have been experienced on other trading desks and across the market as a whole.

The graph below is taken from Swiss Re’s recent ILS market update, which we covered in more detail here. It clearly shows the huge spike in trading at the time of the Tohoku earthquake and further spikes during the peak period of the U.S. tornado season when the Mariah Re cat bonds were impacted and the approach of hurricane Irene which caused further trading volume spikes.

Over the whole of 2011 Swiss Re’s secondary cat bond and ILS trading desk saw over $875m in trades. Trading volumes declined in the last two months of the year due to the significant amount of primary cat bond and ILS issuance which saw traders look to put money into new deals rather than outstanding cat bonds. Had primary issuance not been so brisk, the cumulative figure for 2011 would have been much closer to the 2010 total.

2011 Monthly and Historical Cumulative Secondary Catastrophe Bond and ILS Trading Volume

Cat bond and ILS secondary market trading patterns in 2011 is a post from: www.Artemis.bm
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The industry loss warranty market has seen significant growth over the last decade and now sits poised to achieve as much as $7 billion of notional limit capacity during 2012, according to data from reinsurance broker Willis Re. Their recent ILW market report and outlook, which we covered in more detail here, discusses the size of the market and the expectation that it could return to the hard market peaks of capacity and rate-on-line during the year ahead.

The ILW market has been a little bit like the catastrophe bond market in terms of outstanding capacity from year to year since 2007. We haven’t seen significant growth, which is mostly to do with the tight links between ILW capacity, pricing and the broader trends in reinsurance pricing and availability.

The graph below from Willis Re shows the ILW markets capacity by year since 2003 and the average rate-on-line (RoL) over that period of time. The activity experienced in the ILW market at the start of the year bodes well for the rest of 2012 and Willis Re’s estimate of up to $7.5 billion in limit placed in 2012 looks eminently achievable.

The size of the industry loss warranty market - Source: Willis Re

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

The size of the industry loss warranty market over time is a post from: www.Artemis.bm
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With the completion of their second earthquake catastrophe bond through the Embarcadero Re Ltd. Bermuda domiciled SPV, the California Earthquake Authority now receives 10% of its risk transfer cover from the capital markets via catastrophe bonds. The second Embarcadero Re deal, a $150m single tranche of Series 2012-1 cat bond notes, provides another layer of cover on a fixed cost, multi-year and fully collateralized basis for the CEA, allowing them to further diversify their sources of reinsurance.

The CEA has approximately $3 billion of risk transfer, mostly from private reinsurers. Using cat bonds allows them to diversify their sources of protection and fix costs in for 3 year periods. Cat bonds also allow different layers of risk to be transferred offering different levels of protection, and different levels of risk to be sold to capital markets investors. The CEA said in a press release that this latest $150m cat bond is “another step for CEA toward establishing standardized earthquake CAT bonds as a significant ongoing source of risk transfer”. That would seem to suggest that they may look to issue more cat bonds in the future and build on this $300m of capital markets sourced protection.

“Successful completion of this second transaction demonstrates CEA’s ongoing commitment to diversify and expand its claim‐paying resources,” said Glenn Pomeroy, the CEA’s CEO. “A diverse set of risk-transfer tools, combining traditional reinsurance and catastrophe bonds with post-earthquake federal loan guarantees, will help us make earthquake insurance more affordable.”

The CEA were pleased with their first Embarcadero Re cat bond, which was issued last August, they found it cost-effective and an efficient form of risk transfer. At the time that they would seek to issue further cat bonds every four to six months if the market conditions and investor appetite were right. The press release published yesterday suggested that this was still their goal.

“Using the same basic structure in these repeatable transactions makes it easier for investors to understand the deal and be comfortable with its terms, which also helps to expand the investor base and solidify market capacity for follow-on deals,” said Tim Richison, the CEA’s CFO. “As we said last August, we intend to be back in the marketplace as often as investor interest will support.”

It will be interesting to see how often they try to issue cat bonds and what percentage of their risk transfer could eventually be provided by the capital markets. In the past, traditional insurers have suggested that 5% to 10% of their reinsurance could be in cat bond form, but actually there is no reason that this couldn’t be much greater if the investor appetite was there. Cat bonds can give a cedent much greater control over the protection afforded by different layers of cover in an overall risk transfer program due to the way they can be customised and structured. The CEA is becoming a great model to watch and follow as a progressive user of cat bonds.

California Earthquake Authority now uses catastrophe bonds for 10% of its risk transfer is a post from: www.Artemis.bm
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It seems that you can’t go a week without seeing a mention of catastrophe bonds or insurance-linked securities in a main-stream business newspaper these days. This is testament to the growing profile of the market and the increasing interest in the asset class from both sophisticated institutional investors and now some savvy retail investors too.

The Financial Post, which is the financial markets section of the Canadian National Post newspaper is the latest to offer up cat bonds as a viable alternative investment asset class to their readers (their full article here). They list cat bonds alongside options, hedge funds, real estate and private equity as examples of alternative investment opportunities that can now be accessed more easily by both institutional and retail investors.

Cat bonds, while traditionally the realm of the sophisticated investor can now be accessed by retail investors thanks to initiatives such as the GAM Star Cat Bond Fund (our coverage of that funds launch here) which has a minimum investment size of $10,000. These routes for retail investors to access the market are on the rise the article says.

“If you are looking for something not linked to typical asset classes, cat bonds are unique,” says Ryan Bisch, director of Exotic Alternatives at Mercer Investment Consulting in the article. “At the same time, investors are getting exposure to very large events. If the big one hits San Francisco, clients will always want to know what that is going to mean to them.”

We expect this trend of cat bonds being discussed in main-stream press sources will continue especially if the market grows this year and if more retail investment options emerge.

Catastrophe bonds; a unique asset class offering sizeable returns is a post from: www.Artemis.bm
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The new catastrophe bond which has been issued on behalf of Japanese cooperative insurer Zenkyoren by sponsor Hannover Re, Kibou Ltd., has now completed and managed to double in size before close demonstrating the attractiveness of the diversifying peril that was on offer. Kibou Ltd. was successfully completed and will provide Hannover Re with $300m of cover for some of their reinsurance agreements with Zenkyoren.
By doubling in size during the marketing phase (as we predicted would happen) this cat bond has really demonstrated the desire to invest in diversifying perils that regular cat bond investors have.

The Kibou Ltd. cat bond provides a new layer of Japanese earthquake cover on a parametric basis ultimately for Zenkyoren. The structure of the cat bond differs to the Muteki deal, which became a total loss after the Tohoku quake, and is deemed less risky as a result which could explain the heightened interest from investors.

Standard & Poor’s affirmed the preliminary rating of ‘BB+’ on the single tranche of Series 2012-1 Class A notes.

Kibou Ltd. catastrophe bond from Zenkyoren doubles in size is a post from: www.Artemis.bm
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Swiss Re’s 2010 catastrophe bond deal Vega Capital Ltd. Series 2010-1 has had its rating upgraded by Moody’s after the deal got through its first year without any qualifying catastrophe events impacting it. This Vega Capital cat bond provides Swiss Re with cover against multi-peril losses that may result from the occurrence of up to five events over the three-year risk period to December 2013. Perils covered by the transaction include European windstorms, Japan typhoons, Japan earthquakes, California earthquakes and North Atlantic hurricanes.

With less than two years now remaining on the transactions term, Moody’s notes that the probability of attachment has now lowered as the risk period has shortened by one-third. Essentially the chance of the required number of qualified events with the associated aggregated losses required to attach the notes has significantly reduced.

Additionally, Swiss Re have to pay into a reserve account which is now mounting up and has a balance of $21.3m, this has to be depleted before investor capital. Vega Capital 2010 also has another tranche of unrated notes which provide a layer of protection below the ones Moody’s has upgraded.

Moody’s said:

Due to the size of the remaining first loss layer and structure of the loss trigger mechanism of the transaction that limits the annual losses attributable to each separate peril, the occurrence of more than one of the covered type of perils are required for the Class C Notes to experience any losses.

Interestingly though, Moody’s notes that the Tohoku earthquake did in fact have an impact on this deal and caused a reserve account loss of $15.93m. The Tohoku earthquake and the major aftershock were not sufficient to attach the notes but the reserve account does seem to have been depleted by this amount.

Moody’s notes:

In reaching its determination, Moody’s reviewed two Events Reports prepared by the Calculation Agent which made the following calculations for the two Parametric Japan Earthquake Events:

(1) Earthquake Tohoku, Event Notice dated March 16, 2011,with an Index Value of 285.1 and an Event Percentage of 42.48%, and

(2) Magnitude 7.9 aftershock of Tohoku Earthquake, Event Notice dated April 8, 2011, with an Index Value of 8.4 and an Event Percentage of 0%.

Based on this calculation, the Reserve Account Loss Amount was US$15.93 million. The structure of Vega Capital Ltd. allows for the build-up over time of a first-loss protection layer via payments by the Counterparty to the Reserve Account.

The unique structure of the Vega Capital cat bond could well have been a factor that protected noteholders from losses that could otherwise have attached after the Tohoku earthquake. Investors will be pleased with this report and the upgrade should raise investor confidence in these notes.

Moody’s upgraded the $63.9m tranche of Vega Capital Ltd. Series 2010-1 Class A notes from ‘Ba3′ to ‘Ba2′. As we said, the $42.6m Class D notes were not rated, but it must be assumed that these are also less at risk with the passing of one year of the three-year risk period.

Vega Capital 2010-1 cat bond upgraded by Moody’s on improving outlook is a post from: www.Artemis.bm
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The second California Earthquake Authority catastrophe bond to be issued through the dedicated Bermuda domiciled Embarcadero Re Ltd. SPV has completed successfully and the notes issued have been listed on the Bermuda Stock Exchange. The CEA returned to the cat bond market seeking another fully collateralized, multi-year tranche of reinsurance cover from the capital markets and were successful. The CEA had been looking for as much as $300m of cover in this second cat bond but opted for just $150m through Embarcadero Re Ltd. 2012-1.

The notes issued by Embarcadero Re in this second CEA cat bond provide them with annual aggregate coverage for U.S. earthquakes for a three-year risk period in California. The CEA now benefits from $300m of cat bond coverage in total, but it wouldn’t surprise us to see them return to the capital markets again during 2012, especially as they participate in renewals at mid-year.

James McKirdy, Chief Compliance Officer of the BSX said, “We are delighted to once again welcome Embarcadero Re and the Series 2012-1 Principal At-Risk Variable Notes to the Official List of the BSX. The BSX Listing Regulations for International Issuers of Insurance Related Securities are specifically designed to facilitate the listing of this type of Notes that are offered to institutional and sophisticated Qualified Investors.”

Standard & Poor’s affirmed the preliminary rating of ‘BB-’ on the single tranche of Series 2012-1 Class A notes issued by Embarcadero Re.

CEA’s Embarcadero Re 2012-1 completes and notes list in Bermuda is a post from: www.Artemis.bm
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We’re now into February and we’d like to thank our readers for their support as we’ve had a record number of visitors in January, a great start to 2012. The last week has been busy with more cat bond and ILS deals completing and upsizing, discussion of the ILW markets and more predictions for the year ahead from leading figures in the market. Here are the most popular stories of the last seven days on Artemis.

Top ten most viewed articles on Artemis.bm, week ending 5th February 2012:

1. Catastrophe bond issuance could hit $6 billion in 2012: Axa
   An interview with Axa Investment Managers Christophe Fritsch sees him comment positively on the cat bond market and suggest issuance could hit $6 billion in 2012.
2. Industry loss warranty (ILW) market headed back to hard market peaks
   The ILW market is heading back to the peaks of both capacity and rate-on-line according to a new report from reinsurance broker Willis Re.
3. Ibis Re II and Kibou catastrophe bonds both likely to upsize before close
   Two cat bonds are due to upsize before they closed. Ibis Re II proved us right and Kibou we understand managed the top end of the range we mentioned completing at $300m (more on that deals completion soon).
4. Diversity in the outstanding cat bond & ILS market at year end 2011
   A few data graphs demonstrating the diversity in the outstanding cat bond and ILS market in terms of perils securitized, collateral types and triggers used.
5. Predictions for 2012: Bill Dubinsky, Willis Capital Markets & Advisory
   Our latest predictions piece saw us ask Bill Dubinsky of Willis for his views on the year ahead for the ILS markets.
6. Third Point Re announce operational milestones
   Hedge fund backed reinsurer Third Point Re completes their team and gets down to business.
7. Hannover Re taps capital market investors for retrocession capacity
   Reinsurer Hannover Re secures another large source of retro coverage from capital market investors in the latest incarnation of the K series of deals, now dubbed K Cession.
8. Risk models (and data) are key to broadening scope of the cat bond and ILS market
   We discuss the need for new risk models and increased access to high quality data to help the ILS and cat bond market expand.
9. S&P upgrades Vitality Re and Vitality Re II on positive claims trends
   The two medical benefit ratio linked ILS deals have been experiencing positive claims trends in the business underlying the reinsurance agreements. As a result they get upgraded.
10. CME weather volumes down in 2011 but niche contracts up significantly
    The volume of weather contracts traded in the CME drops in 2011, most of the decline is in temperature contracts but certain niche weather contracts see impressive growth.

Best of Artemis, week ending 5th February 2012 is a post from: www.Artemis.bm
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Artemis.bm is owned by Steve Evans Ltd, an internet and e-commerce consultant

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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Artemis.bm is owned by Steve Evans Ltd, an internet and e-commerce consultant

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.

Third Point Re announce operational milestones is a post from: www.Artemis.bm
Our catastrophe bond deal directory
Artemis.bm is owned by Steve Evans Ltd, an internet and e-commerce consultant