The trend for private market placement of catastrophe bonds continues as news emerges of a transaction that has just been completed by Towers Watson Capital Markets (TWCM). They have successfully closed an $11.95m private placement of catastrophe bond notes through what we believe is a Bermuda domiciled special purpose insurer Oak Leaf Re Ltd.
The transaction dubbed Oak Leaf Re 2011-1 saw TWCM assist an unnamed Florida insurance company to access the capital markets through a private cat bond placement for hurricane cover for the top layer of their reinsurance program. It also provides sideways coverage under circumstances where the insurers third net retention is exhausted.
The transaction is being hailed as an important step for the reinsurance and capital markets convergence arena as it enables a middle-market insurance company to access the capital markets through the issuance of catastrophe bond notes, something which has tended to be the preserve of large primary insurers and global reinsurers up to now.
Oak Leaf Re 2011-1 is an indemnity based transaction and pays out based on either a single Florida hurricane event or on multiple events based on the ultimate net loss of the ceding insurer.
“Towers Watson Capital Markets worked closely with Towers Watson’s Florida practice reinsurance brokerage team to construct a bond that would work in conjunction with the rest of the insurance company’s traditional reinsurance placement,” said Rick Miller, TWCM senior vice president. “The TWCM team dramatically reduced the frictional costs related to ILS issuance. This type of structure will provide middle-market insurance companies access to the capital markets. For far too long, the ILS landscape was primarily the domain of large national insurance carriers that could afford the massive strategic investment.”
“From an issuer’s perspective, this transaction feels very similar to collateralized reinsurance, with some modest additional costs in order to access new markets, and from an investor’s perspective, this transaction caters to a specific subset of dedicated ILS investors that have the expertise to analyze and underwrite an indemnity-based bond using the same data provided to the traditional reinsurance markets,” said Ed Hochberg, president and CEO of TWCM.
It’s interesting to see another private cat bond transaction come to market, particularly so when it involves a middle-market Florida insurer who may otherwise have been unable to issue insurance-linked securities due to the costs involved. Utilising an experienced middle-man such as Towers Watson Capital Markets will have reduced friction in the transaction and may have made the transaction more cost effective for the insurer in question. It’s also interesting to see a successful issuance of Florida hurricane risk during the hurricane season.
Privately placing cat bonds could become a much larger proportion of the ILS market as cedents and issuers could devise transactions based on what they understand to be in demand with investors. This could add a new dimension to the cat bond market and allow smaller players to more easily access capital markets protection which would result in an interesting trend in private market placements at a time when the primary market is so quiet. This transaction will be added to our catastrophe bond deal directory.