Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

$20m Sunshine Re Ltd. catastrophe bond privately placed by Towers Watson


The capital markets and private cat bond specialist arm of professional services firm Towers Watson has completed the issuance and placement of its fourth privately placed catastrophe bond transaction, the $20m Sunshine Re Ltd. (Series 2013-1). Operating in multiple roles, Towers Watson Capital Markets (TWCM) has structured, arranged, acted as bookrunner and placed this cat bond transaction on behalf of a first time Florida sponsor.

Sunshine Re 2013-1 has been arranged and issued on behalf of an interesting first time cat bond sponsor, the Florida Municipal Insurance Trust (FMIT). This organisation is the insurer to the Florida League of Cities, which looks after the interests of Florida municipal governments. The Florida Municipal Insurance Trust provides a range of insurance products to municipal government entities, including workers’ compensation, liability, auto, property and health insurance.

Sunshine Re Ltd. is a Bermuda domiciled special purpose insurer established on the 18th April for the purpose of issuing series of catastrophe bond notes. This first Series 2013-1 issuance sees a single $20m tranche of notes being issued to provide the Florida Municipal Insurance Trust with a source of fully-collateralized reinsurance protection against Florida named storms. The $20m tranche of notes has a coupon of 9.25%.

Michael Popkin, TWCM senior vice president, commented; “We continue to see increased support from insurance-linked securities investors for our private placement approach that brings new cedants and diversifying perils to the market.”

Given the municipal nature of the sponsor, the underlying book of property consists of governmental and municipal buildings, which is interesting as it perhaps offers a small element of diversification when compared to all other Florida wind or hurricane cat bonds which consist of residential homeowners and commercial properties.

The Sunshine Re cat bond transfers risks associated with named Florida windstorms on a per-occurrence basis over a three-year risk period for FMIT. The transaction effectively provides  a source of indemnity-based, collateralized reinsurance coverage to the sponsor, the first time it has sought this type of coverage.

We understand that the layer of cat bond coverage has been designed to dovetail with an existing layer of traditional reinsurance. The transaction effectively sees FMIT take a portion of its penultimate excess-of-loss layer of traditional reinsurance protection and on a pro-rata basis transfer it to the capital markets. The remainder of that reinsurance layer provides one-year protection, so by leveraging the capital markets FMIT has successfully extended that layer of its reinsurance tower to include multi-year protection. TWCM said that the portion of this layer transferred to the capital markets achieved attractive pricing for multi-year collateralized cover.

The three-year nature of the cat bond gives FMIT additional stability and flexibility in its reinsurance program, enabled it to access many new markets and develop new relationships with the growing convergence reinsurance market, according to TWCM.

“I believe this type of diversification is a sign of the confidence the market has in the FMIT,” added Rick Miller, TWCM senior vice president. He also commented that FMIT’s engagement with the changing reinsurance marketplace, including the growing capital markets convergence sector, reflected the joint efforts of TWCM and Towers Watson’s reinsurance brokerage arm.

TWCM worked closely with the Towers Watson reinsurance brokerage arm on this private cat bond transaction. Steve Levene, corporate practice leader for insurance brokerage and risk consulting, said; “The indemnity-based coverage from the collateralized capacity works very well with the rest of the reinsurance placement. FMIT took a lot of comfort in the fact that the cover follows the fortunes of its underlying book of business.”

The transaction has been brought to market by TWCM without the need for a third-party risk modellers support, similar to previous private deals TWCM has been involved in, as the investors who participated in the transaction all performed their own risk modelling. Hence there is no single attachment probability to report as each investor would have derived its own specific view of the risk.

This is happening with increasing frequency in the private cat bond and financial insurance contract market, where many investors have become highly specialised and are able to assess the risk of a transaction themselves. This also means that investors are performing the due diligence on a transaction themselves to assess exactly where in their portfolio this risk fits and how they should allocate to it.

The self-modelled nature of recent TWCM private cat bond placements helps the sponsor keep the third-party service provider costs down on a transaction. This combined with the fact that TWCM plays a number of roles in the transaction, also helping to reduce transactional costs, enable new sponsors such as FMIT to access the capital markets with smaller cat bond transactions such as this one.

Horseshoe (Bermuda) acted as insurance manager for this transaction and Citibank acted as indenture and reinsurance trust account trustee.

Towers Watson Capital Markets continues to push itself as a leading facilitator in the private cat bond space, finding new ways for often smaller sponsors to access the capital markets through catastrophe bond deals. Previously TWCM brought both Oak Leaf Re 2011-1 and Oak Leaf Re 2012-1 to market for a Florida homeowner’s specialty insurance company and earlier this year it brought Skyline Re Ltd. (Series 2013-1) to market for The Cincinnati Insurance Company. This Sunshine Re Ltd. cat bond is the first three-year private placement that TWCM has arranged and placed for a sponsor.

Sunshine Re Ltd. (Series 2013-1) has now been added to our catastrophe bond Deal Directory.

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