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Daniel Brookman
Barclays Capital
CAT BOND MARkET
WEATHERS THE
FINANCIAL STORM
The hiatus in catastrophe bond issuance in the six of collateralised protection in 2009 has been higher than that witnessed following hurricane
months between August 2008 and February 2009 Katrina (see below), in the context of substantial increases in the industry’s cost of capital,
now seems like a distant memory. The niche, specialist catastrophe bonds have been increasingly viewed as a cost-effi cient, viable alternative to
market for insurance-linked securities (IlS), which has equity and debt fi nancing.
evolved over the last 15 years, was successfully reopened
For companies committed to best practice within the fi eld of enterprise risk management, it
in February with the successful completion of the Atlas
is unsurprising that insurance securitisation regularly appears as a fundamental component
v catastrophe bond.
of their exposure control strategy. Indeed, the collateralised nature of the protection, the
Since then, investors have seen two new issues come
quantum of capacity available on a multi-year basis, the fi xed annual cost of protection
to market each month in a remarkable display of
over the life of the transaction and the ability to amortise associated costs over a number of
defi ance of adverse conditions in the fi nancial markets.
years all contribute to the strong case for including insurance securitisation within the risk
So successful has the reawakening of the market been
management toolkit.
that two of the 11 sponsors of transactions so far this
In the early years of the insurance securitisation market, transaction sponsors were often
year were fi rst-time issuers, namely Assurant and the
limited to a small group of re/insurers. Today, the sponsor landscape is far broader. These
north Carolina JUA, and several transactions were
now include groups as diverse as primary insurers, such as State Farm, Allianz and liberty
increased in size during marketing due to strong
Mutual, reinsurers such as Swiss re, Munich re and hannover re, and state entities, including
investor demand.
the Mexican government and the CCrIF. Corporates have tapped the market as well, from
Against a backdrop of escalating credit default swap
dominion resources to EdF Energy and vivendi, as well as investment managers such as
nephila Capital.

levels for some of the industry’s largest reinsurers,
and in the context of fl eeting investor commitment
The careful refi nement of securitisation technology has contributed to the success and popularity
to the equity and debt capital markets, catastrophe of catastrophe bonds over the last 15 years. Standardisation of transaction documentation has
bonds have proven themselves to be a valuable also helped. Illustrated in Exhibit 1, transactions typically employ a special purpose reinsurance
complement to traditional reinsurance. Whilst pricing vehicle to bridge the divide between the insurance market and the capital markets.
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56 | INTELLIGENT INSURER | September 2009
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