Cat bond lite platforms facilitate $329m of ILS deals in 2014

Last year was a record breaker for the use of cat bond lite platforms, as re/insurers showed increased acceptance of specialist issuance platforms, revealing a growing understanding of catastrophe bonds as a risk transfer, reinsurance and capital management tool.

Data from the Artemis Deal Directory reveals that during 2014 cat bond lite platforms were utilised to deploy roughly $329 million of new risk capital into the insurance or reinsurance linked securities (ILS) space, a significant increase on 2013 and all previously recorded years.

In August 2014 Artemis discussed how investors’ perception of the viability of cat bond lite deals as a risk transfer mechanism was changing, resulting in a rapid increase of smaller, privately placed offerings. And, it’s apparent that trend continued throughout 2014 to the year’s end.

In total, the Artemis Deal Directory recorded 14 cat bond lite deals last year, issued via four platforms, as follows:

• The Kane SAC Limited platform, operated by independent insurance manager Kane and launched in August 2013, issued the following deals: Kane SAC Limited (Series 2014-1) $50.12m, Kane SAC Limited (2014-2) $7.32m, Dodeka I $25m, Dodeka II $25m, Dodeka III $10m, and Dodeka IV $28m. Total of $145.44m issued in 2014.

• The Market Re platform, operated by Jardine Lloyd Thompson Capital Markets (JLT) and launched in May 2014, issued the following deals: Market Re Ltd. (Series 2014-1) $10m, Market Re Ltd. (Series 2014-2) $31.825m and Market Re Ltd. (Series 2014-4) $30m. Total of $71.825m issued in 2014.

• The Tokio Tensai platform, operated by Tokio Solutions Management Ltd. and GC Securities and launched in June 2013, issued the following deal: Omamori $25m. Total of $25m issued in 2014.

• The Kaith Re platform, operated by Hannover Re and previously used for the reinsurer’s K Cession capital markets retro transactions, issued the following deals: Li Re (Series 2014-1) $10.37m, Li Re (Series 2014-2) $5m and Leine Re $71m. Total of $86.37m issued in 2014.

This may not be every transaction as, by their nature, cat bond lites are typically privately placed into the investor community and Artemis does not always get to hear about them.

It’s also noteworthy that there were a number of other privately placed cat bonds which did not use an established, publicly available issuance platform in 2014, such as the following deals; World Bank – CCRIF 2014-1, Oak Leaf Re Ltd. (Series 2014-1) and Skyline Re Ltd. (Series 2014-1). These three private cat bonds add another $174m of risk capital to the total, taking privately placed cat bond issuance to over $500m for 2014.

It’s also worth noting that during 2014 Aon Benfield’s investment banking and capital markets unit, Aon Benfield Securities (ABS), launched a catastrophe bond platform called CATstream, although to date we have not heard of any deals that have been issued through it.

Similarly, Willis Capital Markets & Advisory (WCMA) launched a cat bond facilitator of their own last year, named Resilience Re, although again a deal has yet to be issued via this private cat bond mechanism that we have heard of.

So it’s clear to see that over the last 12-18 months cat bond lite, or private cat bond deals are growing in popularity. Sponsoring a catastrophe bond can be a laborious and daunting task, something that is minimised with the creation of private issuance platforms.

But beyond this, the opportunity provided to smaller cedents to enter the capital markets in search of a source of risk capital, as seen with the Market Re deals, Twelve Capital’s use of the Kane SAC Limited platform for the Dodeka deals, is extremely beneficial to firms and investors alike.

Such platforms offer a much cheaper, more cost-effective way for smaller, newer sponsors to enter the capital markets ILS arena, as the lower burden and ultimately simpler issuance process is seen as an attractive way for them to source reinsurance protection.

Discussing the benefits of Aon’s private catastrophe bond issuance platform, CATstream, and highlighting the benefits of such a tool, ABS’ Chief Executive Officer (CEO) Paul Schultz said; “We believe that this facility can only promote the growth of the market, by enabling sponsors to secure capital markets coverage within a short timeframe for the structuring of products in strong and proven domiciles at lower frictional costs.”

Third-party risk modellers are another costly factor that private placement platforms can choose to bypass, as for the most part ILS investors are now sophisticated enough to undertake their own risk modeling.

Similarly, the requirement for a ratings agency opinion isn’t a necessity in order to actively enter the capital markets under a cat bond lite platform, again highlighting the potential benefits for newer, smaller sponsors.

The cat bond lite platforms offer ready-made structures and vehicles, located in catastrophe bond and ILS friendly domiciles, with boilerplate documentation aiming to make the structuring and legal work easier and more cost-effective, while also allowing the sponsor to forgo the use of third-party modelling. Combined the savings can be significant.

So now that the issuance of a catastrophe bond has become simpler than ever before, it’s not surprising that 2014 saw record levels of issuance, from both standard, 144A or public cat bonds as well as the increasingly popular cat bond lite, or private cat bond deals.

Following the recent launch of Willis’ Resilience Re and ABS’ CATstream, meaning there are now at least six platforms available to use, it will be interesting to see whether the capital volume and amount of deals issued through these platforms increases again in 2015.

Should investor appetite continue on the same trajectory as 2014 ended, it wouldn’t be too much of a shock for the coming months to break records once again.

In fact, 2015 has begun strongly for one cat bond lite platform in particular, with the Kane SAC Limited platform issuing four private cat bonds totaling almost $126m just last week.