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
|Vita Capital V Ltd.||Swiss Re||July||$275|
|Long Point Re III Ltd.||Travelers||June||$250|
|Residential Reinsruance 2012 Ltd.||USAA||May||$200|
|Mythen Ltd.||Swiss Re||May||$400|
|Pelican Re Ltd.||Louisiana Citizens||April||$125|
|Akibare II Ltd.||Mitsui Sumitomo||April||$130|
|Combine Re Ltd.||Swiss Re||March||$200|
|East Lane Re V Ltd.||Chubb||March||$150|
|Mystic Re III Ltd.||Liberty Mutual||March||$275|
|Kibou Ltd.||Hannover Re||January||$300|
|Ibis Re II Ltd.||Assurant||January||$130|
|Successor X Ltd.||Swiss Re||January||$63|
|Vitality Re III Ltd.||Aetna Life||January||$150|
2012 Catastrophe Bonds Issuance to Date By Jurisdiction as of 31 August 2012 USD (millions)
Source: Horseshoe Group
|Jurisdiction||Number of Deals||%||Amount||%|
2012 Catastrophe Bonds Issuance to Date. As of August 31, 2012 USD (millions)Source: Horseshoe Group
|Jurisdiction||Number of Deals||%||Amount||%|
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.