Cayman’s ILS shore

Read our article in the Cayman Financial Review Magazine, eversion 

The Cayman Islands is the leading captive domicile promoting the catastrophe bond market, a subset of the broader insurance-linked securities (ILS) or convergence market, which was created out of the merging of the insurance and capital markets. 

Since the issuance of the catastrophe bond George Town Re (named after the capital city of the Cayman Islands on Grand Cayman) in 1996 for then sponsor St Paul Re, the Cayman Islands have been the leading jurisdiction for catastrophe bonds, a form of insurance-linked securities (ILS), and part of the more widely known convergence market – between the insurance and capital markets.

Leading catastrophe bond jurisdictions 

There are only a handful of jurisdictions that cater to the convergence market. They are Cayman Islands, Bermuda, Ireland and Switzerland. Cayman is the leading convergence market jurisdiction of choice for catastrophe bonds, based on its experience – domicile to more than approximately 90 per cent of all catastrophe bonds issued to date since inception of the market in the mid 1990’s – and international role as a leading financial, fund and securitisation centre.
 

Bermuda is increasing its profile as an alternative catastrophe bond domicile since adoption of its Special Purpose Insurer legislation in 2009 and pre-existing role as a leading international reinsurance centre, and Ireland due to its proximity to Europe and less frequent but ongoing selection as domicile of choice by some European-based sponsors. Finally, Switzerland, joined also by the US, England and Bermuda, is home to many dedicated ILS funds and interested institutional investors.

Continued ILS market growth and importance

To date in 2012, the convergence market remains robust with active issuance. Collectively accounting for more than $50 billion of the global reinsurance market capacity of some $450 billion, this capital market’s provided capacity is predicted by some leading market participants to exceed $150 billion or as much as 40 per cent of the worldwide catastrophe reinsurance capacity by 2016.

ILS market growth has been spurred by global investors drawn to the portfolio diversification provided by ILS assets which are uncorrelated to traditional markets – whether the wind blows or the ground shakes is not correlated to the economy.

Reinsurance buyers in turn are drawn to the ILS market as an alternative and additional source of reinsurance capital which comes from the larger capital markets and which supplements traditional reinsurance company capacity. Reinsurance buyers particularly like that ILS capital is fully funded or “collateralised” by capital market investors, coming with no credit risk and not dependent upon a specific company’s rating or ability to pay claims.

 

2012 Catastrophe Bonds Issuance to Date in Cayman Islands As of 31 August 2012 USD (millions)
Source: Horseshoe Group 

Deal Name Sponsor  Month Amount 
Vita Capital V Ltd.Swiss ReJuly$275
Long Point Re III Ltd.TravelersJune$250
Residential Reinsruance 2012 Ltd.USAAMay$200
Mythen Ltd.Swiss ReMay$400
Pelican Re Ltd.Louisiana CitizensApril$125
Akibare II Ltd.Mitsui SumitomoApril  $130
Combine Re Ltd.Swiss ReMarch$200
East Lane Re V Ltd.ChubbMarch$150
Mystic Re III Ltd.Liberty MutualMarch  $275
Kibou Ltd.Hannover ReJanuary$300
Ibis Re II Ltd.AssurantJanuary$130
Successor X Ltd.Swiss ReJanuary$63
Vitality Re III Ltd.Aetna LifeJanuary$150
Total 13     $2,648  

2012 Catastrophe Bonds Issuance to Date By Jurisdiction as of 31 August 2012 USD (millions)
Source: Horseshoe Group 

Jurisdiction  Number of Deals % Amount %  
Cayman Islands 1365%  $2,64862%
Bermuda7 35% $1,63838%
Ireland0 0%  $-  0%
Total20100%$4,286100%

2012 Catastrophe Bonds Issuance to Date.  As of August 31, 2012 USD (millions)Source: Horseshoe Group 

Jurisdiction  Number of Deals % Amount %  
Cayman Islands 1365%  $2,64862%
Bermuda7 35% $1,63838%
Ireland0 0%  $-  0%
Total20100%$4,286100%

Cayman Islands’ leading role

The Cayman Islands are the leading jurisdiction of catastrophe bonds. Of the 20 transactions issued this year through the end of July, Cayman has completed 13 totalling $2.6 billion of the total year-to-date $4.3 billion issuance. These Cayman Island’s transactions have been completed for the who’s who of global reinsurance sponsors, including Swiss Re, Munich Re, Travelers, USAA, Mitsui Sumitomo, Chubb, Liberty Mutual, Assurant, Aetna Life and Hannover Re.

What is ILS? 

At Horseshoe Group, we like to consider a broader nomenclature, ILA, for insurance-linked assets. ILA or ILS instruments have taken various forms in allowing capital markets to participate in insurance risk, with the most common including catastrophe bonds, industry loss warranties (ILWs), other derivatives including catastrophe futures, and more illiquid instruments such as sidecars and traditional but collateralised reinsurance.

Unlike traditional debt and equity reinsurance investments, which often include both legacy issues and operation risk of the underlying company, ILS products, including catastrophe bonds, provide rated debt instruments that are more clearly tied to specific portfolios of natural catastrophe risk such as windstorm, earthquake or mortality risks. To issue a cat bond, a special purpose insurance (SPI) entity is established which funds its reinsurance obligations via proceeds from the sale of securities to capital markets investors. 

Further, sidecars provide equity like investments but are also tied to specific portfolio risk and for limited duration. ILWs provide investment opportunities in clearly specified property risk tied to industry-wide losses (index or non-indemnity). And collateralised reinsurance (a more difficult to quantify part of the market due to its make up by private transactions and the most traditional form of reinsurance capacity provided by capital market investors), which is typically done by way of a segregated cell or a separate account of a reinsurance transformer, like Horseshoe Re.

Cayman Islands’ ILS future

Cayman Islands are known for their high catastrophe bond experience, low cost services and strong, yet flexible regulatory administration. Due to its historical and market leading participation, Cayman Islands are home to the most experienced catastrophe bond service providers – accountants, lawyers and insurance managers – as well as the Cayman Islands stock exchange.

The Cayman Islands Monetary Authority have further demonstrated the country’s commitment to and knowledge of the asset class, including adoption of its new Class C insurance license, specifically authored with catastrophe bond and other collateralised reinsurance structures in mind. With its experience and history, the Cayman Islands remain in excellent position and are committed to continue to be the leading catastrophe bond jurisdiction of choice by global sponsor, arranger and investor market participants alike.

How Horseshoe Group can help 

Few captive managers have been involved in managing ILS-related companies. The Horseshoe Group has been solely dedicated to ILS since 2005 and is employing diverse skills to provide true insurance management services and ensures that investors’ interest are best represented. Horseshoe has offices in all three of the leading ILS jurisdictions – Cayman Islands, Bermuda and Ireland – as well as Horseshoe Re, a leading transformer dedicated to ILS investors.
 

 

Wave-Curlsm
SHARE
Previous articleTAX: Refund of EU taxes
Next articleHow offshore financial centres will save countries
Steve Britton

Steve is responsible for overseeing Horseshoe’s Cayman Islands’ operations which provides full insurance management and advisory services including for Catastrophe Bond SPVs. Steve additionally oversees the activities of Horseshoe Re Limited, the Group’s licensed separate account company which acts as a transformer for investors. Steve has more than 20 years of experience as a capital markets professional, ILS investment banker, insurance underwriter and reinsurance broker, financial guaranty and ILS markets, with previous assignments in Los Angeles, London, New York and Bermuda. 
 

Steve Britton 
Senior Vice President
Horseshoe Group
Governors Square, 3rd Floor
PO Box 425
Grand Cayman KY1-9006
Cayman Islands

T: +1 (345) 328-6690
E: steve@horseshoe.ky
W: www.horseshoeglobal.com 

Horseshoe Group

The Horseshoe Group was formed in 2005 by seasoned insurance and reinsurance professionals with substantial experience within the insurance and reinsurance markets, with offices in Bermuda, Cayman Islands, Ireland and the USA.

Through our staff, we have extensive experience in the areas of insurance company/captive management, sidecars, transformers, insurance underwriting, actuarial analysis, claims audit, due diligence audit and portfolio run-off.

We are able to offer a complete turn-key solution with ongoing management to any customer seeking to establish a new insurance venture, or provide unbundled individual services to compliment a client’s in-house capabilities or arrangements with other service providers.

The Horseshoe Group is independent in ownership and affiliation from any insurance underwriter or broker, accounting firm, law firm or other service provider. We are able to act with impartiality and without conflict of interest in advising our clients, managing their affairs, and working with any third party service provider engaged by our clients.

Our client base includes:

  • Insurers and Reinsurers
  • Catastrophe Bonds/Sidecars
  • Transformers
  • Dedicated reinsurance/ILS funds
  • Hedge funds, money managers, pension funds and private equity firms
  • Lloyd’s affiliates
  • Captives and Rent-a-Captives


As of December 31, 2009, the total assets of clients we provide insurance management services to amounted to approximately $3 billion.

 

Horseshoe Group
Governors Square, 3rd Floor
PO Box 425
Grand Cayman KY1-9006
Cayman Islands

T: +1 (345) 328-6690
E: steve@horseshoe.ky
W: www.horseshoeglobal.com