Singapore attracts Floridian ILS sponsors

May 31 2019 by Nick Ferguson

Singapore’s push to establish itself as the home of Asia’s insurance-linked securities (ILS) market is paying off in 2019. Kind of.

In a significant step forward this week, Florida-based Security First Insurance closed the city’s first catastrophe bond issued under Rule 144A, which is the most common structure used by overseas issuers to tap the US institutional investor base. Following close on its heels, Safepoint Insurance, another Florida insurer, has priced its own Rule 144A cat bond from Singapore this week.

Helping to capitalise Florida’s insurance market was hardly the main goal of Singapore’s push to establish itself as an ILS hub, but the city’s grant scheme and favourable tax treatment are clearly attractive enough to appeal to insurers far and wide — and to the extent that such deals add to Singapore’s institutional knowledge and help market its capabilities, the more the merrier.

Investors certainly don’t seem to mind. The Security First deal, which was led by Swiss Re’s capital markets division, was upsized to raise US$100 million of capital through the issuance of four-year variable-rate bonds by a Singapore special purpose reinsurance vehicle, First Coast Re II.

The deal had originally been structured as a US$75 million bond, which would have matched its maturing First Coast Re deal (and which experienced the opposite journey from guidance to pricing, having started out as a US$100 million deal before being downsized to US$75 million).

Through the deal, Security First has entered into a reinsurance agreement with Swiss Re’s US business, which provides indemnity protection on a per-occurrence basis with a cascading feature. This risk is then ceded to First Coast through a retrocession agreement.

“Swiss Re has been working closely with the Monetary Authority of Singapore on a number of fronts, and, if in line with our goals as a company, we are supportive of this ambition to be an ILS hub,” said a spokesperson at Swiss Re, adding that the company “will continue to help our clients leverage ILS for their business and the recent issuance was one way to demonstrate our capabilities for a specific risk aimed at a defined set of investors”.

While the deal for Security First was a clear success, Safepoint has had a slightly more difficult experience. It came to Singapore with the same goal of raising US$75 million, but subdued demand from investors saw pricing on the dual-tranche deal made more attractive and the size of the deal cut back to US$40 million, according to Artemis.

Price guidance on the first tranche, which has an expected loss of 1.15%, was 4.5% to 5%, but was eventually priced at 5.25%, while the second tranche was marketed at 8.75% to 9.25% on an expected loss of 4.23%, and priced 25 basis points above the range at 9.5%.

The Manatee Re III cat bond will provide cascading and per-occurrence coverage against losses from named storms and severe thunderstorms in Florida, Louisiana, New Jersey and Texas, according to S&P.

Singapore’s grant scheme provides funding for 100% of the upfront costs incurred in issuing ILS, paid for by the Monetary Authority of Singapore (MAS), and is applicable to ILS bonds covering all forms of risks, beyond just natural catastrophe risks. Sponsors and investors can also benefit from a favourable tax framework.

Singapore developed the scheme after forming an alternative risk transfer working group comprising industry specialists in the ILS sector. Chaired by Jon Paradine of Renaissance Re, the group advised MAS on specific initiatives to support the development of the city as an ILS hub.

IAG was the first to take advantage in March, when it raised A$75 million in a collateralised reinsurance deal, and a variety of other structures are being considered.

“There are a number of alternatives we believe we can leverage, and that is looked at on an offering by offering basis and suitability,” said a spokesperson at Swiss Re.

It still remains to be seen if Asian sponsors will be interested. At the Singapore International Reinsurance Conference in November, James Vickers of Willis Re worried that there is a fundamental lack of demand within the region.

“Cat bonds are administratively difficult, whereas everybody knows how a traditional reinsurance contract works,” he said. “Cedants get everything they need from the original reinsurers.”

So while the incentives are clearly attractive to Floridian sponsors, the ultimate goal of using ILS to help close the protection gap in Asia is still a work in progress.

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