ILS’s tide continues to roll in

 As a kid growing up in America, college football was larger than life, as I imagine it is with soccer outside of the U.S., with a plethora of teams and associated mascots to choose from. Like most kids, I had my favorites, based on colors or the school emblem and lore, with intoxicating names and images such as lightning bolts, fighting Irish with fisted Leprechauns, Trojans and other warriors, animals from eagles to horned frogs, bears, gators and tigers and even hurricanes. While my personal alma maters were cougars in the Rocky Mountains and Aggies in California’s wine and farming country, I also had my other favorites, including both underdogs and champions alike.
 

One of these is the current reigning U.S. college football champion, the Alabama Crimson Tide. As the story goes about the schools nickname, Alabama’s white jerseys were covered in the crimson or red clay of the muddy field during a football game in 1907 versus rival Auburn.

During the game, the Alabama football team’s defense so dominated the game that a sportswriter said that they looked like ‘a tide of Crimson’ engulfing their opponent. Today, Roll Tide (Go Alabama!) is a common greeting among Alabama fans, perhaps used more often than hello. Similarly, ILS’s tide continues to roll in, solidifying its place as key reinsurance market player and becoming an ever increasing important partner, if not worthy and assertive opponent, to traditional rated reinsurance company capacity.

Compelling gameplan

Last year, I wrote about Cayman’s ILS shore, the historic leader in domicile for the catastrophe bond market, with the issuance of the first catastrophe bond named after the capital of the Cayman Islands, George Town Re for St. Paul Re in 1996. This decade, two decades on, the globalization of the insurance-linked securities (ILS) market continues at an ever quickening pace, with players, investors (protection sellers/reinsurers) and cedants (protection buyers/reinsureds) alike, expanding from all around the globe, from Alabama (U.S. eastern seaboard) to Zurich, Turkey to Tokyo, and seemingly everywhere else in between.

The compelling story, or gameplan, is the same. Investors are drawn to the non-correlated nature of ILS investments − catastrophe bonds, sidecars, industry-loss warranties (ILWs) and other collateralized reinsurance structures − where Mother Nature doesn’t care about economic, political and global human trends. ILS investors are also drawn to not only uncorrelated but good returns, especially in the current low interest rate environment. Alternatively, cedants, in turn, like ILS’s cash in the bank fully-collateralized structures − often a trust account which holds funds while counterparties wait to see if the wind blows or the ground shakes − which backstop the reinsurance policies’ limits and don’t require dependence upon the claims-paying ability ratings of their reinsurance partners.

Some compelling numbers 

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In June of this year, as reported by broker Aon Benfield Securities, outstanding catastrophe bonds reached $17.5 billion, a new high water mark for the industry. Twenty-seven cat bonds closed in the 12 months ending June 30, including three life and health transactions. (See Figure 1)
In addition to the publicly traded 144A catastrophe bond market, the private collateralized markets − sidecars, ILWs and other collateralized reinsurance deals − which are harder to measure, are agreed to be even larger. Currently, broker Guy Carpenter estimates total collateralized ILS capacity, comprised of catastrophe bonds, sidecars, industry loss warranties (ILWs) and other collateralized reinsurance, makes up just under an estimated one in six of every global property catastrophe reinsurance dollar limit worldwide, or approximately $45 billion. (See Figure 2)

The overwhelming size of the global capital markets − think of the equity, bond, mortgage, credit, currency, interest rate markets − just further bodes how much potential the alternative ILS markets may eventually bear. For example, if a single Boston-based money manager with $160 billion under management should theoretically put 1-3 percent of its assets in alternative or uncorrelated risks under the old adage, not all eggs in one basket, the potential alternative capital market capacity from that company alone would be $2-5 billion, and that’s only one company of hundreds. Numbers like these compelled broker Willis Capital Markets & Advisory to recently predict that the alternative reinsurance capital could reach $150 billon by 2020, pointing out that institutional and high net worth investors could bring more than $300 billion to the market if they invested just 0.25 percent of their total assets.

Some compelling players

For those that like to collect trading cards, here are some notable publically published catastrophe bond sponsors this year: The Cincinnati Insurance Company, Aetna Life Insurance Company, Nationwide Mutual Insurance Company, Citizens Property Insurance (Florida), State Farm, North Carolina JUA/IUA, Turkish Catastrophe Pool, Allstate, Louisiana Citizens, American Coastal Insurance Company, Travelers, Florida Municipal Insurance Trust, Allianz, USAA, Amlin, Munich Re, Assurant, Groupama, AIG, Swiss Re, Renaissance Re, AXIS Capital Holdings, Zenkyoren and SCOR Global Life. The list also includes two new sponsors who were hit by Hurricane Sandy losses last year, New Jersey Manufacturers Insurance Group and the New York Metropolitan Transportation Authority, the MTA. Other notable sponsors last year in 2012 also included the California Earthquake Authority (CEA), Liberty Mutual, Mitsui Sumitomo and Zurich American Insurance.

Some reported notable new investors to the private ILS space this year include, AQR, JP Morgan, Stone Ridge Asset Management and Deutsche Bank Asset Management. And reinsurers Catlin and XL are also staged to set up their own ILS funds, following the path of many other notable reinsurers who manage third-party investor capital via dedicated ILS funds or sidecars including Renaissance Re, Validus, Amlin, Argo, SCOR, AXA, Hannover Re, Partner Re, Lancashire and Montpellier. Leading ILS fund manager Nephila Capital reportedly has turned away more than $1 billion of capital after it closed some of its funds to new investors this year, revealing the strength of investor demand for the asset class.

Sticky hands

Many football wide receivers use ‘stick’um spray’ on their hands or gloves to give them an edge in catching the ball. Some question if all of the new alternative reinsurance capital will stick, or stay, after a big catastrophe event brings first losses.

While there are those opportunistic investors in the market that will back Swedish bus leases or Kentucky horses if they are paying more than Florida wind − and, to be sure, there will be some investors that will always reallocate capital to, at the time, perceived more profitable investments − the best time to write reinsurance risk is ‘after the storm’ when rates are high.

And the new ILS capacity is not just opportunistic hedge funds, but includes dedicated ILS funds, institutional money managers, pension funds, private equity firms and banks, as well as traditional reinsurance company forays. These new market entrants are often sophisticated, having invested significant time and money to deploy in the ILS space, and often hiring experienced reinsurance teams and modeling capabilities, so that they are unlikely to shut down their ILS operations at the first storm or shake. History is also on ILS’s side on this point as after past catastrophe events many ILS investors have ‘doubled down’ versus run away.

Of course, traditional reinsurance is very important. No one’s saying it’s not. But we tease in our office, where many of us come from traditional reinsurance backgrounds, about the often latest traditional market response to the growing ILS tide, which tries to contend that the new alternative capital market capacity will not be around after the ‘big one.’ We smile and say without being cheeky, they just haven’t got the memo yet…ILS capital is here to stay.

Game on

For those of you who are still on the sidelines, or even not to the stadium yet, don’t worry, the game is still new enough. It’s still the first quarter and plenty of time to put your gardening tools away and make your way down to the game. Come on, ILS. Roll Tide!
 

 

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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