Compared with catastrophe bonds, cat bond lite is a more streamlined approach to the securitization of risk. Because of their low frictional cost, these transactions can be done at a lower price and at a faster rate. Tom explained that cat bond lites are smaller tactical deals and have become increasingly popular.
In 2014, $500 million in private cat bonds and cat bond lite transactions were completed. So far, 2015 is off to a strong start, with $200 million in new-limit, publicly revealed cat bond lite. Tom said, “I imagine there’s more that haven’t been announced, and we expect this to grow throughout the year.”
Tom explained that, as this trend is emerging, investors are testing the upper and lower end in terms of cat bond lite size. Tom said, “We’re going to see both ends of the market tested as we did over the past few years with the 144A space.” The smallest he’s seen publicly revealed in cat bond lite is $7 million, and the highest he’s seen is $52 million.
What makes cat bond lite attractive is a certain degree of flexibility and a larger pool of available capital. Many investors have a mandate around securitized instruments, and cat bond lite falls under securitized industry loss warranties (ILWs). Tom characterizes cat bond lite as a traditional instrument that’s repackaged to meet an existing mandate for another corner of the market.