Cat bond lite structure accelerated ILS marketplace: Estera

In an interview with Artemis, Sarah Demerling and Sherman Taylor of Estera Services (Bermuda) Limited, discussed the cat bond lite sub-sector, its impact on Bermuda, and how the island facilitates the issuance of the smaller, yet growing sub-sector of the global insurance and reinsurance linked securities (ILS) space.

Sarah Demerling is a client director at Estera Services (Bermuda) Limited, and currently sits on the Board of a number of Bermuda catastrophe bond vehicles. Sherman Taylor is Estera’s Associate Director, in the Bermuda office.

So far in 2017, the catastrophe bond market has again broken issuance records, surpassing $10 billion for the first time in a single year, with the outstanding market size edging ever nearer to the $30 billion mark. While traditional 144A issuance has remained strong, in recent times the cat bond lite structure, which is typically smaller and more efficient to transact, has become more and more commonplace.

Part of the reason for the growth witnessed in the cat bond lite sector is testament to the increased sophistication and maturity of both the sponsor and investor base.

Sponsors appreciate the lower-friction, more cost-effective and streamlined avenue for accessing catastrophe bond-backed reinsurance coverage provided by the cat bond lite structure.

And as more cat bond lite transactions have completed over the years, investor confidence, understanding and trust in the mechanism has improved, supporting strong cat bond lite issuance over the last few years, with transaction sizes increasing as well.

“The cat bond lite structure has had a dramatic and accelerated impact on Bermuda’s ILS marketplace. In fact, following the release of an updated and enhanced cat bond lite platform on the BSX in 2015, the platform generated nine separate tranches of insurance linked bonds in less than two years, with a combined deal size of $459M,” said Taylor.

To support investor and sponsor willingness to transact cat bond lite deals, the regulatory environment must also be supportive and enable the completion of such a transaction, something Demerling told Artemis was easily achieved in Bermuda, a global hub for ILS business.

“As with the larger cat bond transactions, no specific changes to Bermuda’s existing laws and regulations were required to accommodate the cat bond lite model.

“Issuers found that Bermuda’s segregated accounts act, in existence since the year 2000, provided an ideal platform to launch several small tranches of insurance linked securities from the same issuer, without each time needing to incorporate a new vehicle and obtain a new insurance licence. Each segregated account could be completely ‘ring fenced’ from each other,” explained Demerling.

Bermuda has facilitated the issuance of numerous cat bond lite transactions over the years, but Taylor explained to Artemis how one deal that launched at the end of 2013 was somewhat of a game-changer.

“The issuance of the Windmill I Re €40M bond in December 2013 was one of the first significant ‘cat bond lite’ deals in Bermuda. While the transaction appears to be a typical cat bond transaction, the deal featured a smaller number of investors (ten investors), and absent was the typical 500-plus-page offering circular that is common in the larger cat bond transactions,” said Taylor.

“In fact, this transaction was completed with significantly less transactional documentation than was considered normal at the time.

“The Windmill I Re Ltd. transaction was renewed in the summer of 2017 with the same deal size of €40M, proving that this particular cat bond lite model works, although it has not yet been widely copied, mainly due to the industry’s preference to use segregated accounts platforms for cat bond lite deals,” continued Taylor.

As shown by the Artemis Deal Directory, the Windmill I Re Ltd. (Series 2017-1) transaction is assumed to be a renewal of the 2013-1 deal, providing the sponsor with €40 million of protection against European windstorm risk.

The Artemis Deal Directory and Artemis 2017 quarterly catastrophe bond and ILS market reports show that in 2017 alone, cat bond lite issuance had reached almost $1.4 billion as at the end of the third-quarter.

Furthermore, we may not hear about every cat bond lite, or privately placed transaction that comes to market, so issuance could potentially be even higher for the expanding sub-sector of the ILS space.