Cat bond market as a proxy for the general ILS market:
Northern Rock started of life in the mid-1800s as a UK building society, providing savings and mortgages. As with many building societies in the 1990s it became a bank. It continued to provide mortgages for its customers financing itself in the capital markets. In 2007 it shot to fame as becoming the first UK bank in living memory to have a run on it following it approach to the Bank of England for a loan facility.
Prior to 2008 the standard Cat Bond collateral structure was using a total return swap (“TRS”) with the structuring investment bank. The investment bank invested the collateral into securities of their choice, subject to certain constraints, and swapped the interest rate into LIBOR and guaranteed repayment. Over time and little by little the collateral security requirements were weakened, as with all structured finance products, and the investment banks had greater scope. A cynic may say that the investment banks were given cheap rolling finance from the TRS product.