Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

New record for cat bond lite issuance as 2015 hits $537m already


The growing acceptance, understanding and demand for smaller catastrophe bond issues and privately placed transactions during the first-half of 2015 has already broken all previous records, with just over $537 million of privately cat bonds completed year-to-date.

For the entirety of 2014, the Artemis Deal Directory recorded the issuance of 16 cat bond lite deals, amounting to roughly $503 million.

Investor appetite and perception of cat bond lite (or private cat bond) issuance increased significantly throughout last year, and it’s clear that this trend has continued into 2015 with mid-year issuance already $34 million larger than full-year 2014.

Sponsors appreciate the lower-friction and more cost-effective route to catastrophe bond backed reinsurance protection, while investors appreciate the liquidity of cat bond notes that can be brought to market by a wider array of cedents.

The record-breaking issuance volume already achieved in 2015 came to the insurance or reinsurance linked securities (ILS) space via 17 deals, consisting of 20 tranches of notes. This represents a 5.9% growth in the amount of deals issued year-to-date 2015 compared with the 16 transactions issued during the whole of 2014.

In August last year Artemis discussed how sponsor and investors’ willingness and understanding of the benefits of cat bond lite deals as a risk transfer mechanism and liquid investment were changing, and year-to-date 2015 issuance figures reveal just how apparent the surge in demand and issuance has been.

The burgeoning use of cat bond lite platform issued structures was also noted by PCS in its recent ‘Q2 2015 Catastrophe Bond Report,’ stating; “The continued growth of cat bond lite adoption indicates that the market has seen the value of securitization for private transactions in conjunction with a streamlined issuance process.

“And the structure, rigor, and discipline involved in issuing through a cat bond lite platform may give this form of issuance an edge over private catastrophe bonds.”

The sponsoring of a catastrophe bond can be technical, costly and time consuming task, but the establishment of private issuance platforms can minimise the negatives and also offer cheaper, more cost-effective solutions for newer, smaller sponsors to enter the insurance-linked securities (ILS) area of the capital markets.

Of the 17 cat bond lite or private cat bond deals recorded in the Artemis Deal Directory so far in 2015, 15 were issued via the four main issuance platforms, as follows:

  • The Tokio Tensai platform, operated by Tokio Solutions Management Ltd. and GC Securities and launched in June 2013, issued the following deal: Hotaru $47.6m. A total of $47.6 million issued year-to-date.
  • The Kaith Re platform, operated by Hannover Re and previously used for the reinsurer’s K Cession capital markets retro reinsurance transactions, issued the following deal: LI Re (Series 2015-1) $3.75m. A total of $3.75 million issued year-to-date.

The four cat bond lite platforms utilised so far in 2015 issued a combined total of $434.125 million.

The remaining $68.88 million was issued privately using SPIs set-up for or by the sponsors themselves. These were: Panda Re Ltd. (Series 2015-1) $50m, and Oak Leaf Re Ltd. (Series 2015-1) $53.03m.

It’s important to note that this might not be every cat bond lite, or privately placed cat bond transaction, as given their private nature Artemis does not always get to hear about them. However we endeavour to cover as many of these transactions as possible to give a more complete picture of cat bond market activity.

Of the 12 cat bond lite deals we have the trigger information for (which amounts to $397.31m of total risk capital issued), seven, or 58% of deals utilised an industry loss index trigger, while the remaining 5, or 42% of issued deals used an indemnity trigger.

The charts below provided by PCS in its report highlights that the majority of lite deals issued so far in 2015 adopted an industry loss index trigger, however, in terms of capital volume this was reversed, with the larger portion of risk capital issued utilising an indemnity trigger.

2015 Cat Bond Lite Issuance by Trigger Type

2015 Cat Bond Lite Issuance by Trigger Type

“Interest is growing in the cat bond lite structure across the market, with the greatest opportunities for traditional insurers and reinsurers seeking to securitize ILWs and other risk transfer instruments. Inquiries to Property Claim Services® (PCS®) about cat bond lite have accelerated this year, particularly from untapped areas of the market,” advised PCS.

So one thing’s for certain, the cat bond lite issuance platform division is growing, and growing rapidly.

Cat bond lite platforms alone during the whole of 2014 represented total issuance of roughly $329 million, a record at the time. But so far in 2015 cat bond lite deals issued via platforms alone has reached $434 million, already surpassing last year’s total. With nearly six full months of 2015 to go the number is expected to increase.

It’s also worth noting that cat bond lite transactions so far in 2015 make up 10.03% of total catastrophe bond and insurance-linked securities (ILS) issued and recorded by the Artemis Deal Directory.

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