Page 19 - Demo

18
Cat Bonds issued pursuant to Section 4(a)(2) often receive the moniker of “cat bond lite” because they seek to simplify the structure and more closely replicate traditional reinsurance. While streamlining is often beneficial, one must be careful not to strip away important structural elements for capital markets risk transfer. In particular, the counterparty relationship for securities offerings is fundamentally more diffuse and impersonal than for traditional reinsurance. Consequently, catastrophe bonds are more susceptible to collective action problems, such as inherent difficulties in monitoring claims payments and reserves. In addition, the cedent may not always know the identity of the underlying investor providing protection, which can lead to increased litigation risk.
We do not mean to suggest that these challenges are insurmountable or should dissuade parties from utilizing the Section 4(a)(2) private placement format. Quite the contrary. As with most things, a competing set of elements and consequences must be balanced appropriately.
D. Cat Bond Lite Platforms
The establishment of private issuance platforms can offer cost-effective solutions for newer, smaller sponsors to enter the ILS area of the capital markets. The growing acceptance, understanding and demand for smaller catastrophe bond issues and privately placed transactions during 2015 broke all previous records, with more than $537 million of private Cat Bonds completed in the first half of 2015, via 17 deals, consisting of 20 tranches of notes. Investor appetite and perception of cat bond lite (or private cat bond) issuance has increased significantly. Sponsors can take advantage of this “lite” route to catastrophe bond-backed reinsurance protection, while investors seem to appreciate the liquidity of Cat Bond notes that can be brought to market by a wider array of cedents.
III. Insurance-Linked Securities
upon which the investor justifiably relied. A principal legal consideration for a Section 4(a)(2) private placement is analyzing the scope, granularity and form of subject business and modeling disclosure that should be provided to primary and secondary investors in order to mitigate 10b-5 risk.
Further evidence that the cat bond lite issuance platform division is growing rapidly was marked by the establishment by Willis Capital Markets & Advisory in October 2014 of the Resilience Re platform and the issuance of its inaugural tranche of private cat bonds in December 2015. Other cat bond lite platforms include the Kane SAC Limited platform operated by independent insurance manager Kane and launched in August 2013, the Market Re platform, operated by Jardine Lloyd Thompson Capital Markets and launched in May 2014, the Tokio Tensai platform, operated by Tokio Solutions Management Ltd. and GC Securities and launched in June 2013, and the Kaith Re platform, which is operated by Hannover Re and previously used for the reinsurer’s K Cession capital markets retro reinsurance transactions. By the end of the first half of 2015, Kane had issued $271.19 million, Market Re had issued $111.58 million, Tokio had issued $47.6 million and Kaith Re had issued $3.75 million.6
E. ILS Fund Activity
2015 saw the continuing development of ILS/capital management arms of traditional reinsurance companies, as well as ILS fund launches by global investment managers. Among others, Kiskadee Investment Managers (Hiscox), Lancashire’s Kinesis, RenaissanceRe’s Upsilon, and Aeolus Capital Management each raised capital for new or existing reinsurance/ILS funds in 2015. Schroder Investment Management North America, which has teamed with Geneva-based Secquaero Advisers, launched an ILS fund in 2015 for U.S. investors to complement its existing offshore ILS fund platform. Deutsche Asset & Wealth Management, an investment management division of Deutsche Bank, launched an ILS fund in 2015, having previously secured seeding for the strategy from Tages Capital. We expect to see additional ILS fund launches from both traditional reinsurers and global asset managers in 2016, as projects begun or incubated during 2015 are rolled out to investors.
We also saw the announcement in 2015 of a few notable startup ventures backed by industry heavyweights. Vario Global Capital Ltd. was launched in late 2015 by specialist insurance analysis and modelling firm Vario Partners LLP
6 Amounts are those reported by www.artemis.bm.
Developments and Trends in Insurance Transactions and Regulation 2015 Year in Review