Private cat bonds provide ILS test-bed & entry-point for sponsors: GC

by Artemis on December 21, 2015

Private catastrophe bonds, also known as cat bond lites, provide a useful way for sponsors to test the ILS market and their appetite to sponsor larger deals in future, as well as an entry-point for sponsors seeking lower limits.

The private cat bond market has seen significant growth in 2015, with the highest level of private or lite cat bonds ever recorded coming to market during the year. Details on all the transactions that Artemis has collected data on can be found in the Deal Directory.

According to GC Securities, the investment banking and broker-dealer arm of reinsurance broker Guy Carpenter, the continued growth of the private or lite cat bond market is down to the ability of sponsors to use these lower friction transactions to issue smaller deals more cost-effectively, or to test out their appetite for catastrophe bond sponsorship.

“The growth of the private cat bond market this year is a function of sponsors with lower limit needs or those sponsors testing the alternative capital market for the first time,” GC Securities explained in its latest quarterly cat bond market report.

Sponsors can use the private structures, such as Rule 4(2), Regulation D and Regulation S securities markets, if they are wanting to try out the capital markets-based as a way to “gain the same benefits as larger sponsors using 144A catastrophe bonds,” GC Securities said.

This ability to try out the market, or to access smaller amounts of reinsurance limit, through the sponsoring of smaller privately arranged and placed cat bonds has added a new dimension to the market, benefiting both sponsors and investors.

The private or cat bond lite structure has also helped some ILS fund managers to acquire risk in a liquid, securitised form to meet specific ILS fund mandates, as evidenced by the Dodeka series of transactions from ILS manager Twelve Capital.

GC Securities explained why private cat bonds are lower friction for sponsors; “Private catastrophe bonds differ from 144A catastrophe bonds in that there is no formal offering prospectus, no expert risk analysis from a third party modeling firm or rating on the notes.”

And lower friction in terms of the effort of issuing a private cat bond or ILS deal translates into a lower cost for the sponsor to bear, making this an accessible way to enter the market. This is also beneficial as there are fewer investors available for the private structures, with more seeking the full 144a style cat bond issues.

“Private cat bond structures result in lower expenses relative to 144A offerings, which offset the smaller pool of capital market investors that consider such private cat bond opportunities (relative to the larger pool 144A cat bond investors),” GC Securities continued.

Overall the continued growth of the private cat bond market is indicative of both sponsors and investors “becoming increasingly comfortable with using insurance-linked securities to either buy or sell protection, respectively,” GC Securities said.

Private deals are playing a useful role in the catastrophe bond market now. With $547 million of truly lite cat bond deals issued year-to-date, plus one large $300 million private transaction sponsored by AIG, the private market is set to become a meaningful part of annual catastrophe bond issuance statistics.

Also read:

Cat bond lite issuance reaches new heights in 2015.

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