Tax reforms could drive more corporate cat bond issuance: Anger, GC Securities

The heightened use of indemnity structured transactions by corporates in the catastrophe bond arena is expected to open up the market, but for this to happen in a meaningful way, there’s likely need for some U.S. tax reform, according to Cory Anger, Managing Director of GC Securities.

A key development of the catastrophe bond space has been the expanded application of parametric products, particularly among corporates and the public sector.

Radical advancements in the design of parametric triggers has resulted in some innovative transactions over the years, and also helped to unlock both new perils and regions.

But while the attractive qualities of a parametric structure remains for corporates and acceptance continues to expand, these entities are increasingly looking at indemnity solutions as another source of risk transfer.

“What’s exciting to see is the movement toward indemnity triggered covers for corporates,” said Anger, speaking as part of last month’s Artemis ILS NYC 2021 conference.

“We’d always talked about it in the context of parametrics with them. And, while it’s important because what they find they can do is that they can cover losses that may be supplemented or excluded, and so they can apply the coverage across all sources of losses that may come from it.

“But, I think there’s a number of corporate that say ‘listen, we want to make sure that we’re covered for the losses that we’ve incurred, that we can measure and model.’ And, so, I think the fact that we’re seeing more indemnity based coverage in the corporates is going to open up the market.”

For this to happen in a meaningful way, according to Anger, there’s a need for some U.S. tax reform to allow corporates to engage with offshore special purpose reinsurers.

“The limitations on risk pooling and the requirements are actually impeding the ability for this market to grow. And, I think it would actually grow faster if we didn’t have those restrictions in place.

“And, so, I know that there’s been efforts to onshore SPVS and I think if we could onshore them, that would help out with corporates as well,” said Anger.

She went on to explain that in her mind, investors would rather take on complexity of insurance risk that has low correlation, rather than assume a higher amount of investment risk embedded into an ILS structure.

This is because “their main rationales for coming into this is that they want something that’s got a lower correlation while still delivering the return.

“So, I really feel like for them to get a better return, they’re focusing on the insurance risk and what’s being brought to them. And, that doesn’t mean that it has to be simple structures. I think the evolution we’re seeing is the broadening of complex structures as well,” she explained.

Of course, this issue doesn’t impact all investors in the same way and Anger noted that for those that are offshore, it might not be a consideration at all.

“But, operationally, it becomes a lot easier for the portfolio managers that are already onshore to work in assuming risk. And then, also, it may attract more capital from U.S. sources into the space.

“I really feel like the restrictions that are put in place, withholding tax restrictions in ceding risk to offshore entities, and then not clear guidance on what risk pooling is, has made it challenging. And, so, the transactions that you’ve seen from a corporate perspective, the market should be applauding the fact that we got them there despite all of the tax considerations that we’ve had to go through,” said Anger.

The session, which was broadcast first to event registrants on Tuesday 9th Feb, can now be viewed below:

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