Bermuda continues push for more cat bond and ILS business

Bermuda continues to promote itself as the island destination for the catastrophe bond and insurance-linked securities market. With its role as one of the major reinsurance hubs of the world, a modern stock exchange in the BSX and attractive regulatory and re/insurer formation regimes, the island is perfectly suited as a centre for ILS. The Bermuda Monetary Authority (BMA) is the latest to agree that the island is increasingly becoming a centre of the global Special Purpose Insurer (SPI) and Insurance Linked Security (ILS) business.

So far in 2012, up to September 30th, the BMA said that it has registered SPI’s with total premiums of $595 million, including four SPI’s underwriting over $1.2 billion of cat bonds.

Shelby Weldon, Director, Licensing & Authorisations at the BMA commented; “Registrations are sustaining similar levels from last year across all classes. Fifteen Special Purpose Insurers (SPIs) had registered in Bermuda by the end of September 2012 – one registration higher than the same period last year. A total of 33 new insurers registered during the first three quarters of 2012 – the Authority registered 35 firms during the same period in 2011.”

In September itself two insurance managers and one Class 3 reinsurer were registered. The €100m Eurus III Ltd. European windstorm cat bond which completed in September is a Bermuda registered SPI. Of the 15 SPI’s to have formed in 2012 on the island, four were cat bond issuers, with the rest being sidecars and catastrophe fund vehicles. A number of the re/insurers which formed so far this year on Bermuda were founded by hedge funds or are operating as fully collateralized reinsurers. This company registration activity ensures Bermuda has a large share of the overall non-traditional reinsurance market.

Mr. Weldon added; “We are seeing continued momentum and high levels of market interest in the SPI and ILS spaces. This supports reports from industry that Bermuda is emerging as an innovative centre for this type of business due to the wide variety of SPI uses we are starting to see develop.”

Bermuda has seen an increasing amount of activity in the ILS, cat bond and non-traditional reinsurance space ever since new rules were introduced to make SPI formation easier back in 2009. The new rules seem to be having the desired effect and the Bermuda Stock Exchange has similarly been working hard to promote the island.

“The process of convergence between the (re)insurance industry and the capital markets, combined with Bermuda’s quality environment continues to attract sophisticated clients to the Island,” Mr. Weldon said. “The Authority is pleased that the framework put in place in late 2009 has supported an increase in SPI registrations over the last three years.”

To date 36 ILS and cat bond deals have been listed on the Bermuda Stock Exchange (BSX), which accounts for approximately one-third of global market issuance. The volume of ILS and cat bonds listed on the BSX doubled in under a year over the first half of 2012. It stood at around $4.7 billion back in July but with the addition of another Embarcadero Re cat bond it reached just under $5 billion in August.

The BMA cites the example of the record sized Everglades Re Ltd. cat bond, which at $750m is the largest single tranche cat bond deal on record, as another example of Bermuda’s continuing growth in the sector. The Everglades Re SPI is Bermuda domiciled and the $750m of notes it issued are listed on the BSX.

The BMA also highlights that SPI’s are starting to complement traditional insurance models. This is a trend we are likely to see continue, with a number of new entrants to the market using Bermuda as a base for their reinsurance-linked underwriting and investment strategies, many of which use SPI’s or various classes of re/insurer. With more special purpose  reinsurance vehicles slated to launch in time for the January renewals and a strong forward pipeline of cat bond deals being discussed in the market, it is likely that Bermuda will continue to grow its share of the non-traditional reinsurance and also reinsurance-linked investment spaces.

“As well as the much spoken of cat bond SPI’s, we are seeing a wide range of SPI uses this year,” Mr. Weldon said. “From property catastrophe reinsurance like European windstorm and Florida hurricane coverage, to Excess of Loss and Industry Loss Warranty coverage, we are starting to see a lot of innovative uses in the SPI space.”