Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Lack of supply spurs Clariden Leu to issue ‘Cat Bond Lite’


A lack of new catastrophe bond issuance causing a subdued primary market has resulted in a lack of new investment opportunities for managers such as Clariden Leu which they say is the reason they issued their recent ‘cat bond lite’ transaction. The novel transaction was developed to create investment capacity for Clariden’s insurance-linked security investment clients.

Further information on this transaction is now available in the latest managers comments report for the Clariden Leu (Lie) Cat Bond Fund. The transaction become the only primary market activity in the insurance-linked security industry in August.

Clariden says that the positive growth of their cat bond funds have not been matched by sufficient issuance activity in the primary catastrophe bond market. This has hindered their ability to offer investors good returns combined with a well diversified portfolio.

They say they have been exploring opportunities within the market with potential cat bond sponsors to try to find new ways of placing risks with the capital markets. Clariden Leu sees an opportunity for this kind of smaller, leaner transaction with a much quicker time to market.

So to that end Clariden Leu issued its first direct insurance-linked transaction – the “Notional US Natural Perils Catastrophe Derivative Transaction” with an initial issue volume of US$20m. This meant Clariden acted as structurer and arranger for the transaction which essentially created an ISDA OTC transaction which was then transformed into a tradable security eligible for investment.

Clariden breaks the deal down as:

  • Clariden Leu has written an index-based transaction, selling USD 20 Mio protection to an industry cedent on an industry-loss warranty basis (ISDA-based);
  • Clariden Leu issued certificates for the full USD 20 Mio limit (denomination USD 1’000 per certificate);
  • Clariden Leu offers a liquid market for the certificates with price feed to all standard information systems (Bloomberg, Lipper, Reuters);
  • Clariden Leu’s insurance-linked funds have invested in this series of certificates, benefiting from the bank’s balance sheet and capabilities as a market maker for structured products.

So essentially Clariden entered into an agreement to take some risk off an insurance or reinsurance cedent, transformed that risk into certificates which could be traded and invested in, created a market for those certificates and sold them to their investment base.

This is a really smart way to increase the available investment opportunities for their clients. This kind of innovation is exactly what is required to keep the market moving at times when it is slow. The product Clariden Leu have created almost sounds like it could be marketed as a scheme to buckets of insurers to give them a way to access the capital markets, removing the barriers of cost of issuing a cat bond themselves.

Clariden Leu say they have no intention of becoming an active structurer for ILS but when required they will continue to find novel ways to extend the asset class and make investment opportunities available. That said, we wouldn’t be at all surprised to see them team up with someone who can act as structurer for a product such as this.

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