Secquaero Advisors, the Swiss based insurance-linked security investment manager, is teaming up with an Australian partner to bring insurance-linked securities to Australia for investors.

Secquaero have partnered with Plus Capital Investment Management Pty Ltd to help them distribute their products into the Australian market. Secquaero has an ILS fund which it will be marketing there. The opportunities for investors in Australia will include both catastrophe bonds and life insurance-linked securities we believe.

Australian institutional investors now have a range of options to invest with locally partnered insurance-linked security specialists since Nephila Capital have also branched out to target that region, as we reported in August.

We wonder whether the increased profile for ILS in Australia helped by these new investment opportunities may encourage local reinsurers who could be tempted to investigate issuing a transaction themselves.

The recent earthquake in Christchurch, New Zealand on September 4th which registered Mw7.0 on the Richter scale has been cited as the most damaging the country has seen in years. It is estimated that the quake may have damaged as many as 100,000 of the 160,000 homes in the city.

AIR Worldwide has released its estimates on the insured losses which can be expected from this disaster. AIR Worldwide state that industry insured losses will be between $2b and $4.5b U.S. dollars. EQECAT stated expected insured losses of $1b-$4b in its initial statement on the disaster.

Losses are uncertain and likely to rise given the extent of the damage to buildings. AIR says that gale force winds forecast and aftershocks could cause additional stress on already weakened buildings in the area.

New Zealand experiences many earthquakes each year, around 14,000 in total, but on average only 20 have a magnitude in excess of 5.0 making this an unusually large one.

Insurance Australia Group who rank as the largest general insurer in New Zealand says that it expects its claim costs will be entirely covered by its reinsurance arrangements. Analysts say that large, global reinsurers such as Swiss Re and Munich Re will end up bearing the brunt of the losses although the NZ EQ Commission has a disaster fund which will also be helping people affected by the earthquake.

Information is beginning to emerge about a novel transaction undertaken by leading Swiss insurance-linked securities investment company Clariden Leu. We believe the bank has designed this new transaction type in order to create available investment capacity for clients in its cat bond fund.

Details are not very clear as this has been an unrated transaction and no press release was forthcoming. From what we have heard Clariden Leu transformed a $20m U.S. natural peril industry loss warranty (ILW) contract into insurance-linked notes which can then be made tradeable in the secondary market. It’s believed that the ILW can be triggered by a $15b loss although we’re unsure exactly what perils are covered.

Clariden Leu recently stopped accepting new subscriptions to its Cat Bond Fund due to the lack of new investment opportunities in the market. We read this to mean the fund was oversubscribed at the time and the lack of issuance made it impossible to find investments for new clients. It’s possible Clariden Leu have now found a way to create investment opportunities in cat bonds through this method of transforming insurance risk into catastrophe bond notes. This is the first we’ve heard of this type of transaction being issued.

Clariden Leu are now said to be working on a similar deal involving European windstorm risk and may use the PERILS loss index as a trigger.

We’ll bring you more information if it becomes available.

When we said back in July that a Merna Reinsurance III Ltd. catastrophe bond issuance was likely, what we of course meant was that it had already been issued… It transpires that the formation of Merna Reinsurance III Ltd. as a licensed entity in Bermuda was for a very specific, single investor catastrophe bond issued by State Farm.

Aon’s recent annual review of the insurance-linked security market includes a mention of this cat bond transaction as having completed right at the end of June 2010. Details are scant and we cannot uncover any rating information for this transaction. It appears not to have been marketed to ILS investors, rather a single investor had been lined up in advance and purchased all of the associated notes.

$250m Merna Reinsurance Re Ltd. provides State Farm Mutual Automobile Insurance Company with reinsurance protection against a number of U.S. risks. These include U.S. hurricane, earthquake, severe thunderstorm, winter storm and wildfire. We assume that a deal with a range of risks involved such as this was of great interest to the sole investor as a way to diversify the risks they held.

The deal utilised an indemnity trigger and was issued as a single tranche of notes. We assume as they have this detail in their report that Aon Benfield Securities have managed this transaction for State Farm.

We’ve added this latest cat bond transaction to our Deal Directory.

Chile is a country extremely prone to earthquakes, as evidenced by the 8.9 magnitude quake which devastated areas of the country in February this year. You would be forgiven for thinking that as a country plagued by earthquakes it would have a robust risk management and insurance culture. It doesn’t, but talks are beginning to take place which could see that improve.

It’s being reported by various sources that the Chilean regulator of insurance and securities (Superintendencia de Valores y Seguros) is now considering using alternative risk transfer methods such as issuing a catastrophe bond to fund its earthquake and catastrophe insurance needs. Head of the regulator Fernando Coloma, told a recent audience, that as well as discussing cat bonds the regulator are considering ways to bring lower premium earthquake insurance policies to Chile through microinsurance means.

Next year the regulator will carry out a study to develop a model of earthquake risk in Chile and then will assess insurers reserves and ability to pay claims should major quakes occur.

It sounds like Chile really needs both of these things. Catastrophe bond structures would insure the government and insurers themselves so that there is money available to pay claims. Microinsurance products for the public would ensure affordable and predictable earthquake cover was available to even poorer segments of the Chilean community and if index-based in some manner would allow for quick payouts.

Chile already uses microinsurance products for some of the farming community.

As the market for risk transfer and hedging of pension liabilities grows this year, news comes from Aon that the liabilities and obligations of UK companies to their pension funds have hit all time highs.

Combined pension liabilities for UK companies have increased by 20% over the last 12 months and now sit at an astounding £1.2 trillion and Aon call this total a significant risk. The main reason for the increase is the lower yields available on government bonds which a lot of pension schemes are invested in.

Marcus Hurd, head of corporate solutions at Aon Consulting, said: “Market conditions have never been as tough as they are today for final salary pension schemes. The value placed on pension scheme liabilities has now hit an unprecedented £1.2tn. Traditional scheme investment strategies are struggling to keep pace in rapidly moving markets.”

With this in mind it’s unsurprising that analysts are forecasting that longevity risk transfer is going to grow rapidly. It would be extremely desirable to get pension liabilities off your balance sheet at the moment.

Marcus Hurd continued: “Pension scheme liabilities at this level pose a significant financial risk to UK businesses at a time when there are real fears that market conditions could deteriorate further.”

Fitch Ratings issued a report which looks at the current state and outlook of the reinsurance market. The report, Fitch’s 2010/2011 Reinsurance Review and Outlook which you can download from their website, looks at how the market has progressed and suggests possible trends to watch for in the coming year.

They highlight Solvency II as big change for the insurance industry and cite the potential need for insurers to purchase more reinsurance to meet capital adequacy rules as a possible reason for increased interest in insurance-linked securities and catastrophe bonds. The changing rules that are due to come into place in 2012 as a result of Solvency II certainly could see a higher profile for catastrophe bonds and European insurers may find they are a cost effective way to increase their levels of reinsurance.

The regulatory regime post-Solvency II looks like it will prefer fully-funded vehicles for reinsurance, again a hint that catastrophe bonds may come into favour.

We’ll have to wait and see once the final regulatory landscape is clear and Solvency II is implemented but it could turn into a positive for this market.

We know their are people out there reading this who will disagree and have thoughts about why Solvency II isn’t a positive thing for the ILS and cat bond markets. We’re interested to hear your opinions so please contribute by commenting below.

Hurricane Earl made a close pass by the Caribbean Leeward Islands this week and damage loss estimates are starting to come in. Losses are being tallied for the Virgin Islands, Puerto Rico, St. Maarten, and St. Martin.

AIR Worldwide estimates that losses to date from Earl are somewhere between $50 and $150m. Nearly half of that total is attributed to the damage incurred by St. Maarten where high winds tore down power lines, toppled trees  and damaged roofs and signs.

The Caribbean Catastrophe Risk Insurance Facility has responded quickly to damage on islands which have purchased its cover and have already announced payment for Anguilla. Unfortunately St. Maarten are not covered under the CCRIF scheme.

Hurricane Earl is still predicted to skirt the U.S. seaboard and is being watched nervously for any turn to the west which could see it side swipe or make landfall somewhere around North Carolina. Catastrophe bond holders will be watching the developing situation nervously.

The Atlantic continues to be active; tropical storm Fiona is heading towards Bermuda although isn’t expected to strengthen too much as she is passing over the seas which have been disturbed by Earl. Tropical storm Gaston formed late yesterday and may be one to worry about as currently it is heading straight for the Caribbean islands and is predicted to have winds over 100mph by the time it reaches Antigua and the other Leeward islands.

Keep an eye on hurricane and tropical storm developments here.

Pension Insurance Corporation (PIC) has entered into an agreement with Alliance Boots to insure the Alliance Unichem UK group pension scheme. The buyout means that PIC now looks after the pensions of 3,000 members.

It’s becoming a very popular transaction amongst UK companies looking to offload their future pension liabilities. It allows them to cap their liabilities and makes longevity payments predictable. Longevity risk transfer is a sector that is growing rapidly and involves transactions using buyouts and longevity swaps/hedges.

David Collinson, head of origination at PIC said: “I am delighted that we were able to help the trustees and sponsor of the pension fund bring safety and security to member benefits. We were impressed by the high quality of advisers, including Towers Watson as advisers to the sponsor, and Mercer as advisers to the trustees. This was a complex transaction in which PIC was able to make use of the unusual conditions in the gilt and swap markets to provide the client with a very compelling price that was able to be effected through a single insurance contract guaranteeing the members’ pensions. Having had discussions with other pension funds along similar lines, we expect to see more of this type of transaction.”

This was the smaller of Alliance Boots group pension schemes and there are rumours that they may attempt a similar transaction with their larger scheme in the future.

An interesting situation has come about after Glacier Re, the Swiss based reinsurer, announced that it was putting itself voluntarily into run-off. On the 27th August Glacier Re announced that it had reviewed its strategic alternatives and decided to discontinue its underwriting operations and go into a self-managed run-off.

Glacier Re was the issuing sponsor of the Nelson Re catastrophe bond transactions and as such the rating agencies have been taking a look at how the run-off situation could affect the existing tranches of each insurance-linked security.

Moody’s have responded by downgrading the outlook for the following tranches of Nelson Re. $45m of Class H notes and $67.5m of Class I notes have both had their outlook downgraded to negative from stable. $67.5m of Class G notes have had their outlooks kept at developing while the situation is assessed. Classes H and I provided cover for European windstorm risks while Class G provided cover for U.S. hurricane and earthquake risks.

As part of the Nelson Re deal Glacier Re pays reinsurance premiums to Nelson Re Ltd. which it then passes on to investors who hold the bonds as interest. Moody’s notes that as Glacier Re business runs-off it will reduce some of the catastrophe risk to Nelson Re noteholders. However, Moody’s states that as the run-off continues Glacier Re could see less value from Nelson Re and that could lessen the incentive for Glacier Re to make its reinsurance payments. That would result in a strategic loss for the noteholders.

We feel that’s unlikely, but it is correct for Moody’s as a rating agency to make investors aware of this new risk. Moody’s say they have kept the ratings unchanged (despite the change in outlook) as they feel Glacier Re is still likely to honor its obligations as it’s in good financial health, regulations is strong in Switzerland and there is also reputation risk for leaders at Glacier Group should any strategic default occur.

The Class G notes have remained on a developing outlook as they are likely to be triggered due to losses from hurricane Ike anyway and therefore Glacier Re will have to continue to pay the reinsurance premiums if they are to recover paid losses from Nelson Re.

It’s one of the more complicated rating ammendments to a cat bond transaction that we’ve seen but good to see the rating agencies responding in a manner we’d expect.