One year after Kane SAC launched its private cat bond platform, Kane Bermuda’s managing director, Robert Eastham, talks to Bermuda:Re+ILS about the platform’s success and how Bermuda paved the way for its initiation.
Bermuda has often pioneered the introduction of new offerings within the insurance-linked securities (ILS) space as it has in many areas of risk transfer more generally over the years—and the introduction of Kane SAC’s catastrophe bond platform is no exception.
In August 2013, independent insurance manager Kane launched the platform via Kane SAC, to allow the issuance of smaller, private transactions, which could be traded and listed on the Bermuda Stock Exchange (BSX).
Thirteen months after its establishment, the platform has attracted more than $135 million of issuance.
Driven by investor demand, the platform has been a great success but, as Robert Eastham, managing director, Kane Bermuda explains, being based in Bermuda has played an important role.
“Over many years, Bermuda has evolved into a major international reinsurance centre which has now also become a preferred centre for ILS activity,” he says. “This activity is being conducted within a pragmatic regulatory environment which has developed appropriate protocols and rules to enable fully collateralised contracts to be transacted in a manner which is both more efficient and cost-beneficial than that provided by other domiciles.”
Developed as an extension of the collateralised insurance transactions that the company had been facilitating through Kane SAC since 2007, Eastham explains, unlike most cat bonds—where the sponsors, the insurers, are central—these first transactions have been investor-driven.
“We launched the platform as a result of investor interest and specifically to meet the needs of certain categories of investors who for various reasons required notes to be issued for smaller private transactions in both a tradable format and listed on a public exchange,” he explains.”
“There is clearly an interest in expanding the format to facilitate smaller more traditional cat bond-type transactions.”
“The underlying structure of transactions on the platform remain very similar to a typical transformer transaction, however by expanding disclosures and amending the note format we were able to meet BSX listing requirements and formally register the platform on the Exchange.”
To date, the platform has completed seven transactions—one in 2013 and six in 2014 (see Table 1 below), all of which are listed on the BSX.
Eastham, who describes the current mechanics of the platform as “relatively simple”, says there are plans to further enhance the platform and broaden its attractiveness to a wider investor audience.
“For the moment these transactions are just an extension of the collateralised reinsurance transactions that we’ve been doing, but there is clearly an interest in expanding the format to facilitate smaller more traditional cat bond-type transactions which are tradable and can offer electronic settlement,” he says.
“Ideally, we’d like to see the notes currently in issuance traded; there has been interest and serious discussion between investors and we have got close to achieving this but, to date, no trades have closed.”
The Kane SAC platform allows the transfer of risk around the $10 million mark, with the smallest deal so far as little as $7 million.
Previously unobtainable to the smaller to mid-size cedants, these bonds represent the evolution and maturity of the ILS market.
“From a market perspective, platform trades are relatively small in both number and size. However, I firmly believe that it represents an important element in the future expansion of the ILS market,” says Eastham, who doesn’t believe that these bonds will affect rates or market direction in the near future.
“As with any industry, the feasibility of all transactions is subject to a cost:benefit analysis and, with today’s low rate environment, the level of structuring costs in relation to deal size has become a more significant factor in the decision-making process.
“In terms of the platform, $7 million is the lowest that we’ve seen so far, and I’d imagine that from an economic perspective, in the current environment, this level is pretty close to the bottom.”
The driving force
The success so far, and the ability to further enhance the platform in the future, has been and continues to be driven by Bermuda’s firm establishment in the sector, according to Eastham.
“Bermuda has been very successful in the ILS market and I believe leads the way in collateralised reinsurance,” he says.
“As an example, Kane Bermuda, one player of many in the Bermuda market, has in excess of 50 active segregated accounts currently facilitating ILS transactions, some of which are on a multi-party basis. Furthermore, Bermuda has recently seen significant success in the cat bond market and, based upon the level of current activity, appears also to have become a domicile of choice for this market segment.”
Earlier this year, the BSX reached a record level of issuance, with ILS, cat bonds and insurance-linked investment funds reaching a total of $12.4 billion.
While Eastham doesn’t expect the final months of the year to be as active as the first six months, he revealed that the company is currently working on a few transactions, which he says will launch before the end of the year.
Kane SAC, Kane Bermuda, Robert Eastham