Question on ART

Hi

I read the core reading about ART in chapter 3 and have following questions:
1. For committed capital (page 26 in CMP), it said this product is to provide guaranteed capital when some adverse events happened causing financial strains. Then the last sentence in the core reading said the insurer can issue securities at predetermined price, knowing that the price would be higher after this event. Should it be lower? I mean if the price would be higher why would they bother to buy the option at the first place if it is the capital they need?

2. In both credit securitisation and insurance linked security, spv is mentioned. I only heard of spv in cat bond. I thought credit securitisation is kind of like surityship type of insurance. Does that need spv as well? I found the definition of these two are kind of overlapping and not sure about the difference.

3. Is there any discussion about ART in 2007 GIRO paper? I know I could look for myself, just wonder whether anybody has already done so . I want to read more about the common used ART in the market. Any idea which paper I should look at? Thanks for recommendations.

Thanks
Cynthia

 

Hi Cynthia

1. I think the core reading means that the cost of raising capital would be higher after the event. In other words, the market value of institution's securities would be lower than exercise price of put option after adverse event so additional capital required can be raised at predetermined price. This will also preventing unnecessary dilution of company's equity if share capital used.

2. An SPV is a bankrupcty-remote special purpose vehicle created specifically for each transaction to hold the assets used for basis of the securitisation. They are used for a variety of financial transactions to mitigate counterparty risk not just for ART solutions.

I'm not sure how a credit securitisation would use a SPV as these are used to enhance the creditworthiness of asset-backed securities amongst other things.

I think an insurance-linked security is more like a securitisation of assets not a credit securitisation.

3. Not sure about GIRO but there is a good SIGMA paper (The Picture of ART, No 1/2003) on financial engineering on which this section of core reading is based. Look in archive on http://www.swissre.com/sigma

I hope this helps.