JLTCM anticipates greater innovation around weather bonds

Following the completion of the Market Re Ltd. (Series 2016-5) catastrophe bond, Jardine Lloyd Thompson Capital Markets (JLTCM) expects to see further innovation around weather bonds, highlighting the willingness of the ILS market to assume this risk.

As shown by the Artemis Deal Directory, the Market Re Ltd. (Series 2016-5) deal is the first time since 1999 (Kelvin Ltd.) that weather risk has been introduced to the insurance-linked securities (ILS) market through a catastrophe bond structure, underlining the innovative nature of the deal and the willingness of the space to assume the exposure.

“The good news with it all was that it was a proof of concept that the market is willing to accept that risk, and you had specific issues around price discovery, that may or may not exist in other types of transactions.

“But the one conclusion you can draw is that the market is quite willing to get exposed to weather risk,” said Edward Hochberg, Chief Executive Officer (CEO) of reinsurance broker JLT Re North America and Jardine Lloyd Thompson Capital Markets (JLTCM), speaking at the JLT Re press briefing at the 2016 Monte Carlo Reinsurance Rendez-vous.

It’s a valid point, and the completion of the deal does show how the ILS market and range of capital markets investors are willing and able to assume such risks, a trend that Rick Miller, Co–head of ILS at JLTCM expects to continue and expand.

“We anticipate more innovation around weather bonds as it relates to European temperature as well as hedging the risks associated with a lack of consistent wind in the heartland of the US (i.e. for wind power generation).”

“As investors see more of these types of weather-related deals come to market, their ability to invest the time to build internal models to analyze the historical data will further increase,” said Miller.

Despite the deal downsizing owing to the removal of one tranche of notes while marketing, it’s important that it closed and has the potential to open up the marketplace to increased securitisation of weather risk, a peril that ILS fund managers would appreciate seeing more frequently in the cat bond market.

Investors in the ILS and reinsurance linked investment space continue to seek new risks and with temperature risks coming under increased focus it really does show the maturity, sophistication, willingness and ability of the sector to complete such deals.

While marketing the Class B tranche of notes was removed from the innovative temperature risk catastrophe bond, which boiled down to both parties getting comfortable with the deal, according to Hochberg.

“I think really what it boiled down to was the parties felt comfortable with the A notes and where those settled out.”

Michael Popkin, Co-head of ILS at JLTCM provided some further insight into the transaction.

“For this inaugural deal, investors spent a lot of time analyzing and understanding the risks. This will help them as they evaluate our other weather-related cat bonds,” said Popkin.

“A nice feature of the JLTCM private placement approach is that frictional expenses are only incurred if there is actually a deal. This allows a cedant to test the market with a real offer of a transaction and enter into a proper dialogue around the risk to be transferred as opposed to merely presenting a take it or leave it fully baked 144a structure.

“This means that the final deal might not look exactly like the original one, but, in the end, reflects one that both cedant and investors see as market clearing,” continued Popkin.

That makes the private placement catastrophe bond platform a useful tool for those seeking reinsurance and retrocession and wanting to test the appetite of the capital markets and ILS funds to assume that risk, particularly for more novel and innovative risks or transaction structures.

Only time will tell if more deals like this come to fruition, but it might not be too surprising owing to how well the deal was reportedly received by the market. When questioned on the possibility of doing another deal like this, Hochberg said, “very possibly, yes.”

You can read all about the Market Re Ltd. (Series 2016-5) weather risk catastrophe bond and every other transaction in the Artemis Deal Directory.