ILS Intelligence
The insurance-linked securities (ILS) market was put to the test during 2011, with three catastrophe bonds suffering a total loss. However, ILS fundamentals remain robust and market conditions are good for a strong pipeline of transactions in 2012, says Paul Schultz of Aon Benfield Securities.
a 25-year average of 1,203. 2011’s count was 43 percent above the 25-year average. According to Impact Forecasting, the top 10 insured global loss events for 2011 included four US severe weather events, with a combined insured loss estimate of $18 billion.
Given relatively infrequent capital losses from catastrophe bonds, the
loss of the three catastrophe bonds’ principal caused the ILS markets to pause and regroup. But it is important to remember that the loss of the Muteki and Mariah notes did not represent a failure on the part of the ILS market. The losses tested the structural integrity of the bonds, which proved to be robust and efficient. Sponsors realised that catastrophe bonds, as intended, provided secure coverage for such events, while investors recognised that the loss was within modelled tolerances. We feel that, despite its being a testing year for ILS, 2011 ended on a high note for the market given the extremely robust new issuance levels in Q4 2011.
A WORD ON EUROPE The recent volatility and uncertainty in the EU, arising from questions
over whether certain eurozone countries will continue to be able to manage their sovereign debt obligations, has led to an increased focus on the underlying collateral solutions used in catastrophe bonds.
Sponsors and investors are still concerned about credit risk, and some
are increasingly worried about the widening yield differential between solutions based on the Euro Interbank Offered Rate (Euribor) and money market funds.
The spread differential is best illustrated by the significant increase in
recent months of the Euribor-OIS (overnight indexed swap) spread—the difference between the central bank overnight funding rate and the level at which banks are willing to lend to each other.
Historically, the three-month Euribor-OIS spread has been around 10
basis points, but it has jumped to more than 95 basis points, representing a material level of returns for investors. The available yield pickup highlights the importance of a Euribor-linked reference rate through the use of either a Tri-Party Repo (TPR) or Medium Term Note (MTN).
However, the TPR solution has somewhat fallen out of favour due to investors’ and sponsors’ aversion to bank counterparty credit risk, and
Spring 2012 | INTELLIGENT INSURER | 43
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