Standard and Poor’s rates high excess casualty risk

Capital markets minimize exposure to catastrophic insurance risks and as a result, public and private equity investors are buying notes exposed to natural peril and mortality catastrophic risks with high excess casualty exposure recently being securitized and rated by Standard & Poor’s Ratings Services.
Avalon Re Ltd. recently issued three notes for $135 million each that covered successive layers of reinsurance to Oil Casualty Insurance Ltd. (A-/Stable/–). The funds were used to purchase high-quality investment securities and placed in a collateral account. These assets will protect Oil Casualty for three years against cumulative worldwide excess general liability exposures, including general liability risks such as third-party bodily injury or property damage. It excludes protections from war; terrorism; damage from nuclear, biological, and chemical weapons; and gradual pollution such as asbestos or groundwater contamination, neither of which is event driven. The total return on the collateral account is guaranteed by Goldman Sachs Group Inc. (A+/Stable/A-1).
Payment on the notes is dependent on the performance of Goldman Sachs International as total return swap counterparty, Oil Casualty, and Oil Casualty’s general liability exposures. The modeling was performed by two independent parties and Standard & Poor’s further reviewed and stressed the probability of attachment. The Avalon Re Ltd. Class A variable rate notes were rated ‘A-‘, the Class B variable rate notes were rated ‘BB+’, and the Class C variable rate notes were rated ‘B’.
“The aggregate $405 million raised in the capital markets is modest compared with the $13 billion outstanding in insurance-related securitizations as of June 30, 2005,” Standard & Poor’s credit analyst Grace Osborne sayys. “However, it marks an important broadening of scope in the type of risks willing to be absorbed by investors. As capacity grows, insurance companies will have increased flexibility in shaping their reinsurance programs, which should translate over time into more optimal committed coverage and reinsurance costs.”