ILS flock to the BSX
Twenty eleven was the year that Bermuda made its mark and solidified its position as a leader in servicing insurance-linked securities (ILS) structures. While the Island has been acknowledged as a centre of excellence for reinsurance for some time, attracting ILS structures such as catastrophe bonds to use Bermuda vehicles was lagging.
As the world’s third largest reinsurance market, home to 1400 insurance companies with total assets of $442 billion, intuitively we could see that Bermuda was a natural place for the establishment and listing of ILS structures. In fact, many Bermuda reinsurance companies had issued cat bonds or set up special purpose vehicles such as sidecars, so Bermuda had deep experience and knowledge in this area. What it took to launch Bermuda as a more attractive domicile for ILS structures—and as a listing location—was a change in regulation.
"For institutional investors such as pension and dedicated funds, the low correlation between ILS and captial markets makes them particularly attractive, especially considering present economic conditions."
Spearheaded by the Bermuda Monetary Authority (BMA), in consultation with domestic and international industry participants, regulatory changes that were enacted in October 2009 streamlined the process for the incorporation of ILS structures, expediting the time for these structures to get to market. In essence, the amendment applied to Class 3 insurance incorporation legislation and clarified the rules for the creation of these special purpose vehicles, making their creation more straightforward, and significantly reducing the time it takes to get these vehicles to market. The regulatory changes established a new designation of ‘special-purpose insurers’ (SPI) as part of the BMA’s licensing and supervisory framework. This change has been a very positive step in encouraging SPIs to set up in Bermuda.
The timing, it seemed, was ideal, as alternatives to traditional reinsurance capital formation grew alongside investors’ desire for an asset class that was not correlated with the broader capital markets. It appeared that we had prepared and positioned Bermuda and the Bermuda Stock Exchange (BSX) in the right way at the right time. Team Bermuda went on roadshows, holding a variety of meetings in New York, London, Canada and around the globe to re-acquaint the markets with Bermuda and these changes—and it has really paid off.
The BSX has been promoting the fact that listing securities on an internationally recognised stock exchange such as the BSX makes the securities significantly more attractive to potential investors, such as pension and dedicated funds, and have been encouraging companies to set up not only structures such as cat bonds here, but also to list them on the exchange. Twenty ten was a significant year for us in that we were successful in establishing name recognition in this space, and in July 2010, the BSX announced it had cat bond listings valued at more than $1 billion for the first time.
In 2011, we saw continued growth. The BSX again broke its record for ILS listings, reaching the milestone of $2 billion and then, for the first time, reaching more than $3 billion in listed securities by the end of 2011. Twenty-five ILS with a total value of $3.373 billion were listed on the exchange as of December 31, 2011. The BSX’s 25 listed ILS weremade up of four securitisation programmes, 13 notes issued pursuant to these programmes, six notes issued as stand-alone securities, and two specialist exchange trade fund classes. In the same year, the exchange marked its 40th anniversary and received investment from the TMX Group, the owners of the Toronto Stock Exchange.
We at the BSX feel that we have achieved a great deal in the last two years in the ILS space. The SPI designation has been very successful. According to the BMA, 23 SPIs had been formed in Bermuda by December 31, 2011, and the majority of these formations were sidecars, while others had been created to issue catastrophe bonds. In 2010, 10 were formed throughout the whole year.
In January 2011, Chartis, the property and casualty insurance unit of American International Group, listed a $450 million catastrophe bond through Compass Re on the BSX. Munich Re gained extra capacity through Queen Street IV Re’s issuance of a $100 million BSX-listed catastrophe bond in November. The last ILS to list in 2011 was Lloyd’s insurer Amlin’s first cat bond, the $150 million Tramline Re, on December 22.
At the BSX, we are looking to provide capital market support to the developing ILS market segment. For institutional investors such as pension and dedicated funds, the low correlation between ILSconsidering present economic conditions.
As we move forward into 2012, the indications are that interest in catastrophe bonds will continue and issuances will be met in the market with similar uptake. We have developed critical mass in respect of listings and incorporations in Bermuda and a track record for quick turnaround times for setting up SPIs and cat bonds, so we expect to be even busier this year. Greg Wojciechowski is president and chief executive officer at the Bermuda Stock Exchange. He can be contacted at: gwojo@bsx.com
