ILS market response to Buffalo Re cat bond impressive: McConnell, ICAT

Artemis recently spoke with Megan McConnell, Active Underwriter at Lloyd’s of London ICAT Syndicates 4242 and 6123, following the successful issuance of its first 144A catastrophe bond, Buffalo Re Ltd. (Series 2017-1).

The deal was well received by both existing and new insurance-linked securities (ILS) investors, and enabled the Lloyd’s participant to strengthen relationships and access a new segment of the ILS market in a meaningful way.

McConnell discussed the ease and speed of which the deal was completed when compared with a traditional reinsurance placement, underlining the significant attractiveness of utilising a multi-year catastrophe bond structure alongside its substantial use of collateralised reinsurance.

Artemis asked McConnell about the experience of sponsoring a 144A catastrophe bond for the first time, and specifically how this compared to a collateralised reinsurance placement.

“From our perspective, the underwriting process for the bond was faster and more streamlined compared to a traditional placement, even a placement with collateralised reinsurers. The ability of the ILS market to respond quickly and with a meaningful amount of capacity is impressive,” explained McConnell.

In the past, the Lloyd’s of London ICAT Syndicates have purchased a substantial volume of collateralised reinsurance protection, and McConnell was eager to point out that Buffalo Re Ltd. (Series 2017-1) helped to bolster relationships with existing ILS investors.

“We absolutely feel that the cat bond placement helped us to deepen our relationships in the ILS market. Although we have purchased a significant amount of collateralized reinsurance in the past, and will continue to do so, the cat bond allowed us to access a new segment of the market that prefers investments with liquidity,” said McConnell.

Furthermore, McConnell told Artemis that Buffalo Re received strong support from both existing investors via its collateralized reinsurance experience, and also new ILS investor relationships.

“That was an ideal outcome because it gave us the opportunity to grow some existing relationships with people who have supported us in the past and also allowed us to develop new relationships,” added McConnell.

As a result ICAT was able to expand its range of reinsurance capital counterparties, explained McConnell.

“We highly value diversification within our reinsurance panel and we look at that both in terms of individual counterparties, and in terms of ILS, collateralized reinsurance and traditional reinsurance.

“Collateralised capacity is always attractive to us because it is capital efficient, especially when we consider credit risk; the challenge is to avoid over-exposure to any one segment of the market, particularly markets who may have so much capital tied up post-event that they can’t continue to support the program.”

Interestingly, McConnell said that in terms of coverage, the catastrophe bond placement is very similar to the company’s traditional placement, which meant that in the firm’s mind the bond fits right into its overall programme, highlighting the “multi-year component” as a “significant attraction” for the firm.

“As a company buying about $750m of reinsurance coverage, fluctuation in the price of reinsurance is a major risk for us, particularly when the reinsurance market moves faster than the primary market. It makes sense for us to place a portion of our program on a multi-year basis to dampen that effect, and although the traditional market has become more amenable to multi-year deals recently, it often comes at an increased price,” continued McConnell.

It’s clear that for ICAT the deal made sense and McConnell told Artemis that the firm sees the 144A catastrophe bond structure as a valuable option to have at their disposal, both for the firm and its investors.

“If we can continue to give the market options for ways to provide capacity to our business, I think that everyone wins,” said McConnell.

“We were incredibly pleased with the reception from the market. Of course we already know many of the investors, but we were overwhelmed by the response. We know that the market is hungry for risk, but I also like to think that they recognized our deal as an opportunity to back an attractive book of business from a specialized cat underwriter,” concluded McConnell.

Read all about the Buffalo Re Ltd. (Series 2017-1) catastrophe bond transaction and every other cat bond in the Artemis Deal Directory.