One of the many advantages of commenting on the capital markets is their continuous development. During the May 2006 General Assembly of the Geneva Association, the markets were entering a period of some volatility. Volatility has been a recurring challenge to the development of insurance financing and linked securities; however, this latest bout of febrile conditions was met robustly.
Taking the senior debt and hybrid capital markets first, in May, the differential between bank and insurance spreads had narrowed consistently during the equity bull market phase that was established in June 2003. May and June 2006 were very testing times for capital markets, yet insurance spreads held up very well in absolute terms and relative to banks.
Although insurance paper widened more than bank spreads and has been somewhat slower to recover, this underperformance has been very modest and has not in any way reduced access to the capital market for insurers. A good example of this strength in adversity is Generali. They issued three tranches of perpetual paper in the Eurobond market on 7th June, 2006, raising 1.95 billion and £350 million. This was competitively priced against a backdrop of very weak stock markets (the recent stock market low was attained on June 13) and considerable competing bank Tier 1 supply. The U.S. capital market has been battling with increased stock volatility, rate uncertainty and the NAIC. The NAIC's approach to bank and insurance hybrid instruments has led to some spread weakness. Yet the market has remained open (witness Swiss Re's US$750 million perpetual issue) and has traded well (Swiss Re's issue has maintained its relative value). Swiss Re's Euro transaction, launched at the same time, has traded in a narrow range as well. Thus, the fixed income capital raising market has shown greater resilience than many expected – allowing issuers to have greater confidence that markets will be available when they want to issue.
More importantly, the market's appetite for absorbing real insurance risks has continued to grow. This is best underlined by a groundbreaking transaction from Swiss Re. The deal, at $950 million, is the largest single bond sale from a Catastrophe bond programme. The securitization, called Successor, covers Japanese and California earthquakes, North Atlantic hurricanes and European windstorms risk. This continues Swiss Re's innovation and leadership in this market both as an issuer and as an advisor. As an advisor, Swiss Re Capital Markets were a lead manager for Liberty Mutual's $200 million BB+ protection against hurricanes in the north-east of the U.S., covering all states bordering the Atlantic from Maryland to Maine, as well as Vermont and Washington DC. The above developments, coupled with XXX/AXXX redundant reserve securitization, EV transactions, AXA's motor transaction and continued investment by issuers, investment banks and investors, is fuelling growth and innovation.
Since the 1980s, commercial banks have successfully used securitization to enhance their financial performance and embraced securitization as a necessary financing tool to manage their capital structure. Recently, the insurance industry has also looked to the capital markets to unlock the value of certain business, free up redundant reserves or perform risk management as an alternative risk transfer mechanism. There are five main categories of insurance securitizations. They represent the key recent developments of insurance securitization, allowing issuers to use innovative capital markets solutions to achieve strategic and financial objectives through these various forms of securitization.
Taking the senior debt and hybrid capital markets first, in May, the differential between bank and insurance spreads had narrowed consistently during the equity bull market phase that was established in June 2003. May and June 2006 were very testing times for capital markets, yet insurance spreads held up very well in absolute terms and relative to banks.
Although insurance paper widened more than bank spreads and has been somewhat slower to recover, this underperformance has been very modest and has not in any way reduced access to the capital market for insurers. A good example of this strength in adversity is Generali. They issued three tranches of perpetual paper in the Eurobond market on 7th June, 2006, raising 1.95 billion and £350 million. This was competitively priced against a backdrop of very weak stock markets (the recent stock market low was attained on June 13) and considerable competing bank Tier 1 supply. The U.S. capital market has been battling with increased stock volatility, rate uncertainty and the NAIC. The NAIC's approach to bank and insurance hybrid instruments has led to some spread weakness. Yet the market has remained open (witness Swiss Re's US$750 million perpetual issue) and has traded well (Swiss Re's issue has maintained its relative value). Swiss Re's Euro transaction, launched at the same time, has traded in a narrow range as well. Thus, the fixed income capital raising market has shown greater resilience than many expected – allowing issuers to have greater confidence that markets will be available when they want to issue.
More importantly, the market's appetite for absorbing real insurance risks has continued to grow. This is best underlined by a groundbreaking transaction from Swiss Re. The deal, at $950 million, is the largest single bond sale from a Catastrophe bond programme. The securitization, called Successor, covers Japanese and California earthquakes, North Atlantic hurricanes and European windstorms risk. This continues Swiss Re's innovation and leadership in this market both as an issuer and as an advisor. As an advisor, Swiss Re Capital Markets were a lead manager for Liberty Mutual's $200 million BB+ protection against hurricanes in the north-east of the U.S., covering all states bordering the Atlantic from Maryland to Maine, as well as Vermont and Washington DC. The above developments, coupled with XXX/AXXX redundant reserve securitization, EV transactions, AXA's motor transaction and continued investment by issuers, investment banks and investors, is fuelling growth and innovation.
Since the 1980s, commercial banks have successfully used securitization to enhance their financial performance and embraced securitization as a necessary financing tool to manage their capital structure. Recently, the insurance industry has also looked to the capital markets to unlock the value of certain business, free up redundant reserves or perform risk management as an alternative risk transfer mechanism. There are five main categories of insurance securitizations. They represent the key recent developments of insurance securitization, allowing issuers to use innovative capital markets solutions to achieve strategic and financial objectives through these various forms of securitization.
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