Swiss private bank and investment manager Clariden Leu have issued another of their innovative ‘cat bond lite’ transactions which see them transform an ILW contract into a catastrophe bond note which can be issued for investment purposes. This is their third such transaction (details on Clariden Leu’s previous cat bond lite deals can be found here) and this time it brings a unique type of risk to their investment fund as it features third-event Florida wind coverage.
Clariden Leu has now issued a total of $120m of cat bond lite notes, which they use as a novel way to secure more cat bond capacity for their investment funds. By transforming an ILW into cat bond note format it can become an eligible investment which they can either offer to outside investors or take directly into one of their own ILS funds.
This latest cat bond lite transaction saw Clariden Leu underwrite a $50m third-event Florida wind PCS ILW contract. The ILW only pays out on a third qualifying event and events must exceed $3 billion, $4 billion and $5 billion estimated losses reported by PCS, in any order for the ILW contract to be triggered and pay out. Clariden Leu then issue a note, through their Bahamas branch, which mirrors the ILW structure, thus transforming the ILW into an transferable insurance-linked security, complete with its own CUSIP and ISIN.
Once the deal is placed Clariden Leu acts as primary market maker with price feeds directly into systems such as Bloomberg and Reuters. The result is an eligible investment for one of Clariden Leu’s own dedicated ILS and insurance-linked investment funds, or it could be offered for sale to other investors.
The contract underlying this cat bond lite is for the 2012 U.S. hurricane season and has an early redemption feature at year end if two or less qualifying events occur. The cat bond lite note pays a premium of 5.25%.
Clariden Leu explained the rationale behind this transaction to us. Third-event U.S. hurricane risk is not available in cat bond format, so by creating this cat bond lite they have added an additional level of diversification for their funds enabling them to offer something unique to clients.
Another fascinating transaction which shows how innovative this market can be. It also leads us to wonder what other ILW risks could be transformed into ILS formats.