For the first time, two major US corporates have issued catastrophe (cat) bonds in the same year, setting the stage for more companies to obtain additional disaster-risk capacity, often at a lower cost than traditional reinsurance.
Kaiser Permanente completed a $300 million issuance of cat bonds in July through an insurance captive, while Amtrak circled a $275 million deal toward year-end. Both deals were increased in size, Kaiser’s by 50% and Amtrak’s by 38%, because of significant investor demand.
The cat bond market has been accessed by major insurance companies since 1996, when St. Paul Re did the first deal, and another three were completed the following year. Since then insurance and reinsurance companies have issued cat bonds on a regular basis, resulting in $8 billion in issuance in new issuance last year, including the corporate deals.
There has been a smattering of cat bond offerings by non-insurance issuers since 2000, mostly outside the US. The $200 million Metrocat Re transaction in July 2013 set the stage for non-insurance company cat bond issuance in the US. It provided the New York Metropolitan Transportation Authority with additional coverage in the wake of Hurricane Sandy that it was unable to accrue from insurers and reinsurers, which already had high risk concentration in the region.
Cory Anger, global head of insurance-linked securities (ILS) structuring at GC Securities, which led both corporate offerings, said the two deals last year provide further assurance of the market’s viability for prospective corporate issuers, and more corporate deals are likely in the foreseeable future.
“When transactions come to market infrequently, they’re looked at as novel and unique,” Ms. Anger said, adding that now corporate finance executives are trying to figure out how the transactions apply to their companies. “The education level about ILS has increased significantly with corporates, and also with the broking teams that help manage corporates’ overall risk transfer programs.”
Ms. Anger added that necessity for corporates to consider cat bonds emerges when a corporate experiences a catastrophic event resulting in a significant increase in insurance premiums as well as complex insurance claims and related litigation. “Amtrak falls more into that bucket, after Hurricane Sandy,” she said.
The Amtrak deal priced for a coupon of 4.5%, at the bottom end of earlier price talk. Its parametric trigger—resulting in a payout to the issuer when certain predetermined parameters related to the catastrophic even are met—tend to result in faster payments than indemnity triggers, in which claims are filed.
The Kaiser transaction provides coverage for earthquake risk and priced at 3.4%, between the 3.15% and 3.65% price-talk range, according to Artemis, a web service that closely tracks cat bond transactions.