As the catastrophe market matures, it is becoming increasingly accessible to smaller issuers or those looking to offload a very specific kind of risk.
One of the latest examples of this is a platform called Market Re that was established this year by Jardine Lloyd Thomson Capital Markets (JLTCM), a unit of JLT Towers Re of the U.K., in partnership with Bermuda-headquartered ILS management. Market Re is a special purpose vehicle registered with the Bermuda Insurance Authority. It allows sponsors to reduce some of the frictional costs they would incur in setting up their own special purpose vehicles because documentation and other parts of the deal process are standardized. Cedents also save money by partnering with the same service providers as other users of the same platform.
“Each cedent, or risk hedger, has its own risk transfer agreement, trust agreement, and collateral, and effectively a unique set of bonds and bond documents that support the trade,” said Rick Miller, JLTCM’s co-head of insurance linked securities. “So it’s ring fenced, nothing is co-mingled, and effectively the only thing the cedents are sharing is the bond building expenses.”
The First Market Re deal, for $10 million, was completed in May for a cedent seeking to cover Florida named storms, as was a $31.825 million offering in June. A two-year, $30 million deal completed in July covering U.S. earthquake risk was split into $22 million and $8 million tranches, each paying investors a coupon of 4%. Coupons across JLTCM’s deals have ranged from low single digits to 14%.
Unlike most cat bonds, which are issued via Rule 144A offerings that approach public offerings in terms of documentation requirements and fees, Market Re offerings are truly private. Investors must be ready and willing to perform risk analysis on their own, which allows issuers to bring deals to market more quickly and with much lower costs.
“One of the questions we asked was how can we make this accessible not just for the largest global insurance and reinsurance companies but for a wider variety of cedents, more insurers and reinsurers overall,” said Michael Popkin, co-head of insurance linked securities.
Miller said Market Re could be used for a variety of reasons. A new issuer can avoid the fees of Rule 144A transactions to test the market, or a larger and more experienced company that may have already have an outstanding private placement may want to add protection incrementally. A larger company could also use it to hedge a very specific risk exposure.
Miller said that JLTCM’s deals are marketed to investment funds with a mandate to invest exclusively in insurance-linked securities. These funds typically license risk models in order to analyze the deals themselves and have reinsurance and risk management expertise. The biggest funds in this arena, such Nephila Capital and Fermat Capital Management, have experienced enormous growth in assets under management recent years, as have newcomers such as Leadenhall.
In addition to collecting a richer spread for the additional due diligence required to invest in private placements, investors may be able to more carefully match the risk exposure they require. “We have ILS investors that are looking to diversify perils, something that is harder to achieve in the less customized and bespoke 144A structure,” said Popkin.
The bulk of the roughly $19 billion catastrophe bonds outstanding have been issued by insurers or reinsurers and are linked to the risk of property damage from windstorms in Florida or the Northeastern U.S. or earthquakes in California.
Miller said that Market Re could also lend itself to issuance by nonfinancial corporates, something that is still relatively rare but much talked about.
Unlike traditional insurance, which tends to be attached to a provable physical loss, a synthetic form of cat bonds available through Market Re could enable a corporate to hedge business interruption or contingent business interruption risk, perhaps stemming from a catastrophic event impacting its supply chain.
“Whether through a traditional private or the Market Re platform, a corporate could transfer the risk posed by a catastrophic event to the ILS market,” Miller said.
Popkin and Miller started their group at Towers Watson and moved to JLT Capital when it purchased Towers Watson’s reinsurance brokerage and capital markets business in late 2013