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Hard market growth a catalyst for first catastrophe bonds: New sponsors


Three new entrants to the catastrophe bond market all said that the current hardening reinsurance market growth opportunity has been a key driver for their sponsorship of a first cat bond transaction in 2020.

investment-growthSpeaking at SIFMA’s Insurance and Risk Linked Securities conference yesterday, representatives of three new cat bond sponsors discussed their motives and what made the cat bond market particularly appealing last year.

Brit, Hamilton and Fidelis all entered the 144A catastrophe bond market in search of reinsurance and retrocession in 2020 for their first times, in the case of Fidelis twice.

Speaking during a panel session moderated by GC Securities Cory Anger, three executives of the companies highlighted what made 2020 the year it made sense to sponsor a full cat bond for the first time.

First, Jon Sullivan, Group Deputy CUO at Brit Global Specialty, who discussed the companies Sussex Capital UK PCC Limited (Series 2020-1) catastrophe bond, which it sponsored in December 2020.

“At Brit we’ve gone from a syndicate model, to a global specialty model, and embracing ILS has been part of that transformation,” Sullivan explained. “The real reason to grow the ILS engagement has been a diversification of risk transfer partners, vehicles and opportunities and the cat bond is just our latest addition there.”

“Our decision to utilise the cat bond market for the first time wasn’t spur of the moment or opportunistic,” he continued. “Our demand for outwards reinsurance capacity has brought us ever closer to the ILS market.

“Every year when we plan our capacity or exposure management, cat bonds have been part of the discussion but up until now haven’t been part of the final construct.

“But the current market impetus, the market conditions that we can see and the changed growth opportunity, significantly increased our cat purchase requirement and put us in a position where we can debut a cat bond.

“Almost more importantly, we can see that future growth will make us a repeat sponsor.”

Second to speak was Hanni Ali, SVP, Strategic Partnerships at Hamilton Group, who discussed the Easton Re Pte. Ltd. (Series 2020-1) catastrophe bond, also sponsored in December 2020.

Ali explained that, “Hamilton have been participating in some way, shape or form in the ILS market since 2017. The timing for the step to a cat bond for us was a function of the acquisition of the Pembroke and Ironshore assets from Liberty Mutual in 2019.

“We closed that transaction August time, but we actually put in place a private cat bond in order to hedge some of the quake and wind risk that we had some uncertainty around out of that transaction. That gave us a taste of how everything fits together and how it works.

“As part of our 2020 planning, looking forward into 2021, it felt like one logical component of our hedging, particularly for US quake and wind risk, was a catastrophe bond to manage that tail risk.”

He continued to say, “This year was the first year where it made sense to be issuing $150m of tail risk protection.

“Another component that you get from the cat bond is the multi-year capacity.

“We felt that now was the right time to be putting in place multi-year capacity, where we’re walking into a harder market, where we anticipate we’ll continue to grow and develop the business in a positive fashion.”

Finally, Philip Vandoninck, CEO of Socium, at Fidelis Insurance, discussed his firms reasons for looking to the cat bond market for the first and second time in 2020, with the June issuance Herbie Re Ltd. (Series 2020-1) and the October issuance Herbie Re Ltd. (Series 2020-2).

Vandoninck said, “For us, size wise as a business, we’ve grown substantially, it’s been a transformational 2020 for Fidelis. As we were on that growth trajectory, the business was now of a size where we could explore a cat bond.”

But he added that, “It’s not something for the faint of heart. There’s a lot of work involved and it’s pretty expensive to do, you need to have a certain quantum size to make the numbers work.”

Continuing to explain the drivers behind wanting to access capital from the catastrophe bond market, Vandoninck explained, “Following COVID we find that a lot of our clients want to become less risky and are transferring it into the reinsurance market, so there is tail risk associated with that.

“So we’re looking to find ways to service our clients needs, but also finding a way that’s capital optimal for the industry as a whole.”

“We were pleased with the engagement with the ILS world, we were pleased with how the first process went and pleased enough that we did another later in the year,” he continued.

Adding, “At the June and July renewals we’d had substantial growth for Fidelis so it allowed us to look into that.

“A key aspect for us here is that it’s a growing space, so that’s important, we want to have counterparties and we want a diverse panel of investors, so we know there’s continued supply there if we were to look at any future issuance.

“Locking it in on a multi-year basis is obviously a critical component, especially if you look at capital. Whenever we talk capital in our group we’re looking at a three to five years down the line, so having something that follows that timeframe is a very useful instrument as a company.”

Reinsurance market conditions suggest the need for tail risk protection will only increase, both among growth hungry companies and the more established larger reinsurers, which means the ILS market can expect to see new issuance continuing to be driven by these dynamics.

Different structures and vehicles will suit different companies, but the value available in the catastrophe bond market at this time should mean a significant proportion of tail risk protection demand finds its way into the capital markets.

Read about every catastrophe bond ever issued in the Artemis Deal Directory.

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