Yesterday we wrote about the launch of a new private catastrophe bond issuance platform by global independent insurance manager Kane and the issuance of the first series of private cat bond notes on it. The first series of just over $9.5m of notes feature underlying risk ceded from the Texas Windstorm Insurance Association (TWIA).
Kane told us that the $9,523,770 Series 1-2013 notes issued by Kane SAC Limited are exposed to U.S. North American wind (hurricane risks). The notes have a one year risk period, being due on the 5th of July 2014 but extendable until 1st August 2019 (presumably for loss development). The notes use an indemnity trigger based on the incurred losses under the ceded portfolio of risk that is included in the deal.
The notes which have been listed on the Bermuda Stock Exchange feature the Texas Windstorm Insurance Association (TWIA) as the ceding insurer, meaning that the U.S. wind risk will be Texas-based from TWIA’s portfolio of risk, likely from the coastal region of Texas where hurricane impacts can be most severe.
The notes have been structured as a zero coupon bond, which suggests that this transaction has been undertaken to suit an investor or collateralized source of capacity, which participated in TWIA’s recent mid-year reinsurance renewals but had a mandate to invest in insurance-linked securities with secondary liquidity, rather than just a collateralized reinsurance contract.
This is one of the use cases for these private cat bond platforms, providing a facility which will allow specific investors seeking to participate in the reinsurance market with a way to underwrite on a fully collateralized basis while receiving cat bond or ILS notes for their investment portfolio.
This also means that while the risk is ceded from TWIA’s ceded reinsurance book, the impetus for the private cat bond issuance is not from TWIA itself and could in fact be a collateralized reinsurer or even the investor which has stimulated, or led, this transaction to occur.
In fact, for this transaction there is no real ‘sponsor’ in the traditional cat bond sense, TWIA are completely passive in this securitization of a portion of their risk into catastrophe bond note form. Rather the investors required a note format for their portfolio and the Kane SAC platform facilitated that.
Many ILS funds will appreciate the flexibility that private cat bond facilities give to them, enabling them to access risk in securitized form more cheaply and from smaller transactions. Other investors, such as some pension funds, have mandates that insist on secondary liquidity in their investments, thus making catastrophe bonds and ILS a more viable option than deploying capital into collateralized reinsurance.
TWIA itself has expanded its reinsurance coverage this year by around 17%, according to reports, while at the same time effectively lowering its retention. The fact that this private cat bond issuance features risk ceded from TWIA shows that the collateralized reinsurance markets have again participated in its renewal and likely on a larger basis given the expansion in coverage within TWIA’s budget levels, probably due to more attractive pricing.