It took more than a decade, but after a carefully planned execution and risk capital setbacks Gallagher Securities has completed the first cyber catastrophe (cat) bond, potentially opening up a major new source of structured bonds to investors, the company announced on Monday.
Gallagher Securities, the insurance-linked-securities (ILS) arm of reinsurer Gallagher Re, privately placed the $45 million transaction, which is fully tradeable under Rule 144A, among several institutional investors.
The deal provides indemnity reinsurance protection against all cyber perils resulting in losses exceeding $300 million after a catastrophic cyber event, such as a ransomware attack on a large enterprise. The structure allows for additional tranches to be issued. The bonds cover relatively remote cyber risk for Beazley, a U.K. insurance and reinsurance company, which is tapping the cat bond market for the first time, according to the Artemis website, which monitors the ILS market.
Additional details about the transaction structure were unavailable.
The deal was completed with a "high quality" syndicate of investors, according to John Seo, co-founder and managing director of Fermat Capital Management, an investor in the Beazley deal that manages approximately $9 billion in ILS assets.
Seo said that one of the key challenges in closing the deal was the current scarcity of risk capital. That scarcity stems in part from several years of catastrophe-related losses including last autumn's Hurricane Ian. That storm resulted in significant losses that insurers and reinsurers are still sorting out. The resulting "hard market" has pushed premium higher and lowered limits.
"It's impressive that this ground-breaking deal got done during such a hard-market condition," Seo said.
The long runway
ILS market participants have been discussing the issuance of cyber cat bonds for more than a decade, and a significant factor inhibiting their issuance has been insufficient modeling of the peril's risk, which investors rely on to gauge potential losses and negotiate deal terms. Seo confirmed that risk analysis of the transaction was performed using a risk model from CyberCube.
In an
In predictions published January 3, Pascal Millaire, CyberCube's CEO, said that reinsurers will work with ILS fund managers to bring new cyber reinsurance capacity to the market in 2023.
Given the need for additional capacity from insurers to cover organizations' ever increasing cyber losses, the cyber cat bond market could see significant activity this year. Seo expects more of a "slow burn," with one or two more deals this year, and three or four in 2024 totaling around $250 million.
