Favourable cat bond & ILS structural trends from H1 2016: GC Securities

A range of structural trends were evident in the first-half of 2016 that have benefitted cedents in the catastrophe bond and insurance-linked securities (ILS) market, according to analysis from GC Securities.

Compared to several years ago the cat bond and broader ILS sector has transitioned into a mature and sophisticated asset class, growing its share of the overall reinsurance market volume and providing efficiency and choice in a constantly evolving risk landscape.

As part of its contribution to the quarterly Artemis Catastrophe Bond & ILS Market Reports, GC Securities highlighted a range of structural trends that were evident in the first two quarters of 2016.

As well as the rise in privately placed cat bond and ILS transactions, GC Securities noted the use of semi-private cat bond structures, such as 4(2) private deals that are resellable in 144A format, with two established 144A issuers during H1.

The two deals that utilised a 4(2) issuance format were the $50 million Espada Reinsurance Limited (Series 2016-1) deal from prolific cat bond sponsor USAA, and the $95 million Manatee Re Ltd. (Series 2016-1) placement from Safepoint Insurance Company, as recorded by the Artemis Deal Directory.

“Overall, such format is part of the suite of offering formats for alternative capital to fit cedents of all types: large/small, one/multi-year and insurers/reinsurers/corporates,” said GC Securities in the report.

As well as sponsoring one of the 4(2) issuances brought to the cat bond and ILS market in H1, USAA also accessed the first all-natural perils 144A catastrophe bond, with the $250 million Residential Reinsurance 2016 Limited (Series 2016-1) transaction.

The Residential Reinsurance platform is one of the most prominent issuance platforms in the history of the marketplace, as recorded by the Artemis Deal Directory, and in recent years has always covered a broad range of perils.

However, the most recent issuance under the platform included the usual range of natural perils (U.S. tropical cyclone, earthquakes (plus fire following), severe thunderstorm, winter storm, wildfire, volcanic eruption, meteorite impact), but also ‘renter policy flood’ and ‘other.’

According to documentation relating to the deal, ‘other’ is defined as any natural catastrophe event that is designated a catastrophe by PCS, which, PCS explains is any event that causes an industry loss of $25 million or more and impacts a substantial number of insurers and insureds.

So this could include landslides and intense rainfall that perhaps doesn’t qualify as a severe thunderstorm, and other natural catastrophe and/or weather events. It’s important to remember that this doesn’t include man-made catastrophes that PCS still reports on, such as terrorism.

“Investors have already been assuming all-natural perils risks in the form of collateralized reinsurance so it is natural in our view that such structure would expand to catastrophe bonds,” explained Cory Anger, Global Head of ILS Structuring at GC Securities.

Another trend witnessed in Q1 and Q2 2016, and something we’ve discussed previously at Artemis, is the longer development periods before collateral can be released. Anger explains that in collateralized reinsurance development periods have been up to as much as 67 months, whereas the cat bond space recently expanded from 36 months to 48 months.

“Investors’ willingness to provide longer development periods is particularly relevant for earthquake risk that can have longer development tail periods compared to other periods,” continued Anger.

Another structural trends witnessed by GC Securities during H1 includes an increased use of putable notes over US Treasury Money Market Funds, which have become attractive to investors “to generate additional overall return with investors seeking such opportunities both in the new issuance marketplace as well as secondary marketplace,” added GC Securities.

Furthermore, there was a greater use of trigger style options in the period, and in particular cascading trigger structures, says GC Securities. Continuing to note that there was also evidence of an increased use of contractual liquidity features in catastrophe bonds.

“Additionally, multi-peril term aggregate protection was also embraced by the ILS investor base,” concluded Anger.

Underlined by the structural trends highlighted by GC Securities during the first six months of 2016, the catastrophe bond and ILS space continues to innovate and establish more efficient ways for capital markets capacity to assume insurance and reinsurance linked business.

The increased use of new and varied structures will only serve to improve the sophistication and maturity of the sector, as investors and sponsors look to embrace and take advantage of the expanding range of market features and structures.

Artemis’ Q2 2016 Catastrophe Bond & ILS Market Report – A quiet quarter fails to keep up with investor demand

Download our Q2 2016 catastrophe bond & ILS market report.

This report reviews the catastrophe bond and insurance-linked securities (ILS) market at the end of the second-quarter of 2016, looking at the new risk capital issued and the composition of transactions completed during Q2 2016.

Q2 2016 issuance failed to hit $2 billion, with just $1.624 billion of new risk capital issued from 14 transactions. This is the first time since 2011 that Q2 issuance has failed to reach $2 billion.

Download your copy here.