Time is short so I’ll not offer much analysis and what analysis I offer is in the form of the questions I asked myself while reading it?
- What money “made the market” and how and to whom are the bonds placed (ie sold)? See this lengthy post I did a week or so back to understand why that question is important.
- What role is TARP playing in financing this deal? Inquiring minds in policymaking positions what to know. (See first bullet point)
- Who are the players making money from the act of doing the deal and how is it structured to avoid past mistakes?
Reuters has the story:
LONDON, Feb 27 (Reuters) – Standard & Poor’s has assigned a preliminary BB rating to U.S. insurer Liberty Mutual’s planned $200 million catastrophe bond, to be issued via special purpose vehicle Mystic Re II, the credit rating agency said.
In a pre-sales report published late on Thursday, S&P said Mystic Re II’s Series 2009-1 notes will transfer some potential losses by Liberty Mutual and affiliates from U.S. hurricanes and earthquakes to capital markets investors.
Boston-based Liberty Mutual, rated A- by S&P, is the sixth-largest U.S. property and casualty insurer.
The new bonds are expected to mature in March 2012 but may be extended by up to two years in the event of a disaster, to allow for loss development and reporting, S&P said.
The deal is being arranged and structured by Goldman Sachs and Swiss Re.
Goldman Sachs will be total return swap (TRS) counterparty, contracted to ensure the collateral backing the bonds is sufficient to meet scheduled interest and principal repayments or pay out to Liberty Mutual if a catastrophe occurs.
AIR Worldwide will be risk modeller for the deal, which will be triggered by insured industry losses from an event exceeding $50 billion, as measured by industry group PCS.
Like French reinsurer Scor’s (SCOR.PA) Feb. 19 Atlas V deal, which reopened the catastrophe bond market after a six-month hiatus, the new Mystic Re II transaction will include strict investment rules for the collateral backing the bonds.
Investors have demanded higher standards of collateral management after four catastrophe bonds effectively guaranteed by Lehman Brothers were downgraded following its collapse by S&P, which cited shortfalls in their collateral accounts.
One of the bonds, issued by Allstate-sponsored (ALL.N) special purpose vehicle Willow Re, is now in default.
S&P said collateral assets will be invested in U.S. government securities, marked-to-market daily by the TRS counterparty, which must top up the collateral pool if it falls below 99 percent of face value.
On Thursday, an investor quoted indicated pricing of 11.5 percent to 12.5 percent over Libor for the bonds, which will be placed privately with institutional investors.
The deal will be the third catastrophe bond issued by Cayman Islands-based Mystic Re with Liberty Mutual as ceding insurer.
Chubb Corp (CB.N), another U.S. property and casualty insurer, is also marketing a $150 million three-year catastrophe bond, to be launched via special purpose vehicle East Lane Re III. Goldman Sachs is lead manager.
The transaction will cover New Jersey-based Chubb against losses over $850 million caused by hurricanes affecting the state of Florida, according to a pre-sales report published by S&P on Feb. 20. S&P has rated the bonds BB. The investor quoted pricing of 9.5 to 10.25 percent over Libor.
Catastrophe bond issuance is expected to rise this year following a squeeze in the market for retrocession, the passing on of reinsurance risks to other reinsurers, where prices have risen about 30 percent in the last six months.
Some $2.7 billion of such bonds were issued in 2008 but new sales halted after Lehman filed for bankruptcy on Sep. 15.
Also those so interested should read this Mr CLS post on Yahoo! ALL as he is absolutely smokin’ hot with knowledge and information on the intricacies of Cat bonds. We’ll have much more on this in a future post. I promised Nowdy over a year ago she’d meet some very interesting and great people in the financial blogosphere and CLS and Sup are two great examples.