At the end of 2011 we wrote about the private catastrophe bond transaction which saw Swiss based ILS investment firm Solidum Partners AG underwrite $52.5m of the California Earthquake Authority’s reinsurance programme for 2012 on a fully collateralized basis. They then transformed this through a special purpose vehicle called Solidum Re Eiger IC Limited, fronting for their ILS investment funds and a partnering co-investor, into a private cat bond with transferable features.
Now the notes issued for this transaction by Solidum Re Eiger IC Limited have been listed on the Channel Islands Stock Exchange (CISX) in Guernsey, making it the first private cat bond transaction to be listed on any exchange worldwide. It’s the first cat bond or insurance-linked security listing on the CISX and this will be welcomed by the Guernsey Finance organisation who have been seeking to get involved in the cat bond space for a while.
Channel Islands based law firm Bedell Cristin was responsible for arranging the listing. They hailed the success as ‘ground breaking’ and said it involved the listing of $52.5m of ‘principal at risk’ notes which are written with a California earthquake reinsurance treaty from the California Earthquake Authority as their underlying asset on behalf of Solidum Partners cell transformer Solidum Re Eiger IC Limited.
Mark Helyar, Managing Partner of Bedell Cristin Guernsey, responsible for completing the listing, commented; “Despite a gloomy growth outlook in some sectors we are delighted so soon after our recent ground breaking transactions in the credit insurance market to have created another very important and ground breaking first for Guernsey. This is an excellent example of the application of Bedell’s highly specialist technical expertise in the capital markets and reinsurance sectors helping to drive continued innovation and growth for our clients.”
For the CISX this is an important first as it brings them squarely into the cat bond and ILS space, offering sponsors another domicile for listing their cat bond and ILS notes. At the moment Bermuda and the Cayman Islands dominate this space, with Dublin, Ireland also having played listing host to a couple of deals. Tamara Menteshvili, Chief Executive of the CISX, said; “This is an exciting and important development for the Channel Islands Stock Exchange. Guernsey already has a leading and mature captive sector in the European time zone, so the listing of high quality specialist reinsurance securities of this type helps to broaden the scope of the CISX offering as well as creating new business opportunities for the insurance sector.”
It will be interesting to see whether Guernsey and the Channel Islands can capitalise on this first to attract more of the ILS, cat bond and also reinsurance market to their shores. Already extremely active in Captives, with some ILS managers having cell or transformer facilities there and with some reinsurance activity on the islands, they could provide a valuable European center for the ILS space.
For Solidum Partners, Guernsey has been the home of their protected cell activities for some time and they have completed a number of other transactions, including the Pollux, Dom and Jungfrau transactions.
Cedric Edmonds, Partner at Solidum Partners and Director of Solidum Re Eiger IC Limited, commented; “Solidum Partners chose Guernsey as a jurisdiction for its cell reinsurance company and private CAT bond platform due to the Incorporated Cell Company (ICC) legislation and the quality and ‘can do’ attitude of the service providers when faced with something new. Solidum was the first entity to issue private cat bonds and to date the only entity to have their private placement cat-linked notes traded. The current listing on the CISX is the next step to broader dissemination and acceptance. To date the Solidum vehicles have issued in excess of USD 100m of notes and we look forward to growing this number in the future.”
John Rowson, Executive Director of Aon Insurance Managers (Guernsey) Limited and a Director of Solidum Re Eiger IC Limited, added; “Guernsey’s proximity to London, robust regulation and secure credit rating give the jurisdiction huge opportunities to grow in this space where innovation and experienced legal firms are essential, having Mark Helyar involved has been critical to a successful and smooth listing.”
Mark Helyar added; “Guernsey and the CISX are ideally placed to support this business in the European time zone because of the specialist insurance and professional sectors able to provide a high quality, transparent marketplace for securitising catastrophe risk in a well regulated and respected jurisdiction. Securitising insurance risk in this highly technical and specialised way allows investors to assume the risk without all the costs and potential problems (management, investment, market, etc.) that they would need to assume if they invested in reinsurer equity or the (few) reinsurer loan notes available on the market. Catastrophe event risk is not correlated in any way to the performance of the financial markets and is therefore a pure diversifier to investors’ portfolios of econometric risk and, as was proven in 2008, tend to keep their value when financial markets collapse.”
This interesting development points towards a continuing maturation of the ILS and cat bond space, with ILS investment managers often taking the lead in driving innovative transactions to market to provide investors with attractive opportunities. Transforming collateralized reinsurance into securities within a cell company is becoming a more common practice and gives investment managers the opportunity to create fund capacity. The practice also allows sponsors to transfer their risks to capital market investors without all of the frictional costs associated with public, rated 144a transactions. Because of this innovation and these benefits the private cat bond trend looks set to continue, but whether it will become a meaningful part of the overall market remains to be seen. The transferability that Solidum Partners created with this Solidum Re Eiger deal is a key factor if private deals are to become more widely transacted. The fact that a private cat bond can be listed on a stock exchange can only help in achieving transferability and liquidity of the notes for investors.