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Cat bonds can be a more permanent source of capital: Anger, ILS NYC 2021


The next phase of the catastrophe bond market will see a shift from the structure’s use for deep capacity and as a risk management tool, to being viewed as a more permanent form of capital, according to Cory Anger, GC Securities.

GC Securities at ILS NYC 2021On day three of Artemis ILS NYC 2021, the audience heard from Anger, Managing Director of GC Securities and Liam Martens, Vice President at the capital markets specialist unit of reinsurance broker Guy Carpenter.

The session focused on the future of the catastrophe bond space with a view to how ILS more broadly can assume a larger role in the capital stacks of global insurers and reinsurers.

Anger explained that albeit a somewhat slow process, the success of getting the cat bond market to where it is today is remarkable.

To start, investors were cautious and as the market evolved and expanded there were ongoing concerns around the ability of the space to pay when losses occur.

But as highlighted by Anger, the competitive and stable pricing attributes post the 2008 financial crisis and the performance of the sector through more recent heavy loss years and the Covid-19 pandemic, has seen the asset class become accepted more broadly.

“I see the next phase shifting from just, ‘okay, I’m going to test it out and I’m going to have some participation in my programme.’ So, it’s more from a utilisation to get incremental capacity, pricing benefits and terms and conditions leverage, to seeing ILS as a form of permanent capital to be relied upon as capital sources for business evolution,” said Anger.

“I think what we’ve seen is the stability of the capital being there. I also think it’s really notable that when we look at the 2020 class of new reinsurer formations, many of them have started and are deploying ILS strategies at inception, along with capital sources that they may have raised from private equity; which is not something that you would have seen with any prior vintage classes of new reinsurers,” she continued.

Anger went on to note the importance of financial flexibility and explained that in her mind, ILS can be a useful tool whether it’s a cat bond or a sidecar format to provide entities with financial flexibility and more permanent capital.

“But, I’ll say also that ILS can’t really remain static. It needs to continue to expand the short-tail risks and the structures that it can provide. It has limitations and, at this point, I don’t see a way to remove certain limitations, such as the lack of reinstatement and a lack of the more finite commutation of terms,” said Anger.

Adding,” But, despite those obstacles, I think that to the extent that we can continue to help risk takers understand broader set of risks, is just going to increase the opportunities that ILS can provide in complementary terms to traditional capital sources.”

While the psychological shift to a more sophisticated use of cat bonds by cedents has been important, Martens stressed the important role the asset class still plays in providing deep reinsurance and retrocession capacity.

“Though, I think, particularly this last to two years in the retro market, and the more heavy usage of indexed cat bonds, has shown that they still have a pretty meaningful role to play in that space as well and in contrast to collateralized re type structures.

“In terms of risk management, I think risk management has sort of always been inherent in any cat bond purchase, irrespective of more pressing considerations like upping front end capacity via a sidecar structure, or managing economic capital in the tail for a reinsurance player doing an indexed cat bond,” said Martens.

Adding, “So, it’s always kind of been part of that framework. I think, in the end, the evaluation most people make in using insurance or reinsurance more generally is, do you have the capital base to sustain the losses that this instrument is otherwise replacing, and/or are my shareholders getting fairly compensated for bearing that risk in the absence of any hedge?”

The session, which was broadcast first to event registrants on Tuesday 9th Feb, can now be viewed below:

Every session from ILS NYC will be made available more broadly via our Artemis Live video channel and audio versions will also be shared via our podcast as well.

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