Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Cat bond lite platforms produce $242m of issuance so far in 2014


The popularity of the cat bond lite, or private catastrophe bond or insurance-linked security (ILS) issuance, continues apace with $242m of new risk capital issued through the recognised private cat bond issuance platforms so far in 2014.

In 2014 we have recorded the most private catastrophe bond deals ever in our catastrophe bond and ILS Deal Directory, with eight lite transactions added to it so far this year. In fact there have actually been ten of these private cat bond transactions, but details have been sparse on two of them, meaning they have not been included in the directory as yet.

Property Claims Services (PCS) has been tracking the development of the market in cat bond lites and found that of the transactions which disclosed the trigger-type, 40% have used an industry loss index trigger with PCS and its data on insurance industry catastrophe loss events acting as the reporting agent.

In fact, based on data we have in the Deal Directory, PCS data has actually been used in 50% of the private cat bonds issued in 2014, as the Omamori also featured a PCS related industry loss trigger.

In terms of the other five cat bond lites issued in 2014, three used an indemnity trigger and one a parametric trigger, one remains undisclosed at the time of writing, showing the diversity in this smaller deal-size segment of the catastrophe bond market.

It’s no surprise to see industry loss and parametric triggers featuring, as they can be an easier structure to issue as well as for investors to analyse and understand, needing less analysis of the underlying risks and ceded business than an indemnity cat bond may require.

The cat bond lite, or private cat bond, platforms have been busy since their launches, with the most prolific in terms of transactions we actually get to hear about so far being the Kane SAC Limited subsidiary of global independent insurance management firm Kane.

The firm has been responsible for the issuance of seven issuances since the launch of its platform a year ago. Two deals closed very recently which used Kane’s issuance platform, the $7.32m Kane SAC Series 2014-2 and the latest $9.245m cat bond from ILS manager Twelve Capital, Dodeka III.

Robert Eastham, Managing Director, Kane (Bermuda) Limited, commented on the success of the platform; “We are delighted to be able to announce a further two Note issuances through the Kane SAC Limited Note Program as we approach our first anniversary. Our success in this relatively short period shows that the platform is becoming a market-recognized means of facilitating the flow of smaller, cost-effective transactions into the capital arena.”

The Kane SAC platform has been responsible for approximately $137m of new catastrophe bond issuance since August 2013 when it launched. In 2014 to date, of the ten private cat bond issues the Kane SAC platform has accommodated six of them, with four being Twelve Capital originated Dodeka deals.

The JLT Capital Markets private cat bond platform, Market Re, has also seen a successful first few months since its launch in May 2014. So far, Market Re has seen three cat bonds issued, totaling almost $72m of risk capital since its launch.

The one other private cat bond deal we have covered so far in 2014 is the $25m Omamori cat bond, a private cat bond transaction issued using the Tokio Tensai platform and facilitated by Tokio Solution Management Ltd.

Cat bond lites, or private cat bond issues, are definitely gaining in popularity. The issuances seen serve two main purposes, first as a way for smaller cedents to access capital markets sources of risk capital and second as a way to transform risks into a liquid security form for investors.

The cheaper costs, faster issuance timetable, lower burden and ultimately easier issuance process of using a private cat bond platform is attractive to first time, smaller sponsors looking to tap the cat bond market as a source of reinsurance or retrocessional protection.

The Twelve Capital Dodeka deals have also shown that ILS investment managers find the platforms useful for transforming risks underwritten into cat bond form, as a way to acquire diversification, bring deal-flow the public cat bond market is not providing and to satisfy investment mandates.

This will not be all of the cat bond lites issued this year. Other ILS fund managers have used these techniques to transform risk into cat bond security form for a number of years. The LGT ILS team, in its former Clariden Leu guise, were regular issuers of cat bond lites as a way to source risk in a cat bond form. We would imagine they still issue these occasionally, as likely do other ILS managers.

Really, what this trend shows, is that issuing a catastrophe bond has got easier and cheaper than ever before, resulting in a proliferation of smaller cat bond deals. With dedicated platforms looking to facilitate the entry of new and smaller sponsors into the market, we should continue to see smaller deals coming to market but also hope to see some of the sponsors lift the deal sizes when they come round to renewal.

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