With first cyber catastrophe bond, investor feedback was critical: AXIS’ Freeman

Taking into account the needs of insurance-linked securities (ILS) investors was a critical component of the work to get the industry’s first cyber catastrophe bond to market, and it was important to ensure the sponsor AXIS Capital’s coverage needs were also met, Kyle Freeman told Artemis in an interview.

Kyle Freeman is the ILS Origination and Structuring Lead at global insurance and reinsurance firm AXIS Capital and played an important role in designing and getting to market the very first Rule 144A cyber cat bond.

Last month, AXIS Capital, the Bermuda headquartered specialty re/insurer, saw its $75 million Long Walk Reinsurance Ltd. (Series 2024-1) cyber catastrophe bond transaction price below the initial target guidance, which gave an important signal of ILS investor appetite for cyber risks.

In an interview, Freeman explained to us that the investor education and communication process has been critical, throughout all the work to get the cyber cat bond marketed, accepted and closed.

“We started talking to investors about cyber in early 2022 to try to understand their level of interest in some form of ILS transaction,” Freeman said.

“Our initial thought was that blending a small amount of cyber into a property cat bond would be the easiest way to get them comfortable accepting some cyber risk.  This approach would have been somewhat similar to how severe thunderstorm, winter storm, and wildfire were introduced to the market back in 2008,” he added.

But said that, “The feedback was very clear that standalone cyber would be preferable, so we pivoted in that direction.”

That initial discovery undertaken with investors helped to drive the direction for the Long Walk Re cyber cat bond, but other important structural decisions also had to be made to ensure that the coverage was adequate from the cat bond, while meeting the investors’ needs as well.

Freeman told us that, “Drafting the event definitions was one of the most challenging aspects of this entire process. We needed to develop a solution that provided AXIS with the necessary coverage in order to make the transaction, and the associated costs, worthwhile to us. However, we also had to work within some very tight constraints. In particular, we needed to implement limitations that ensured investors that the coverage provided was generally consistent with that provided by traditional markets, and we also needed to work within the framework of the modeling performed by CyberCube.

“We feel that we struck the right balance between the competing interests, and we hope that the markets see our solution as a template to be used and built upon for future transactions.”

Freeman also noted the important role that Aon Securities and Sidley Austin played in crafting the first cyber cat bond, thanking the pair “for their partnership that led us to craft a very innovative solution.”

While the decision had been taken to stick to the standalone cyber cat bond approach, there was also more work to do on honing the event definition, Freeman said.

“Unlike the event definitions for property perils that are typically seen in catastrophe bonds, we weren’t able to take a top-down approach in which the event, such as a hurricane or earthquake, is easily identified, thus allowing losses associated with the event to be aggregated purely based on a cat code (and maybe along with some geographic constraints),” he explained.

“Instead, we took a bottom-up approach where we tied each claim to a single originating cause – such as the release of a wormable malware strain, a corrupted software update unintentionally promulgated by the software vendor, or a cloud outage – that could be used to tie those claims together and define a systemic cyber event,” Freeman continued to say.

Adding that, “We then built in some additional constraints to ensure that we were closely aligning the types of events being covered with both what we felt would be covered in the traditional markets and the types of events that were being modeled.”

All of which delivered a structure that cat bond investors could buy into and understand, but importantly also a functional cyber reinsurance cover that had real utility for the sponsor AXIS Capital.

Another hurdle that had to be overcome was in educating the broader ILS investor market, to encourage as many ILS managers and investors to consider the first cyber cat bond deal.

Freeman told us that, “While there were a handful of investors that publicly acknowledged their involvement in cyber transactions, we knew that there were many more that would need to get more comfortable with cyber – not only the peril itself and its modeling, but also the operation of a cyber insurance business – before they would consider investing in any transaction.

“To address the last piece, we set up sessions for investors where we discussed everything from the basics – the AXIS Global Cyber & Technology team along with the cyber policies and coverages that we write – to the more intricate aspects of our business, such as our underwriting practices, our risk and portfolio management philosophies, and how we develop our view of risk.”

He went on to explain why this was important, saying, “This was intended to give investors an opportunity to learn about the peril and how we run our cyber insurance business both the peril and its modeling outside the context of any particular transaction.”

Further explaining that, “We hope that these sessions, and any future ones that we may hold, will help to build a level of trust between investors and AXIS.”

Concluding that, “The amount of interest shown in the sessions and in Long Walk give us confidence that these sessions were very successful.”

You can read all about this first Rule 144a cyber catastrophe bond Long Walk Reinsurance Ltd. (Series 2023-1) and details of every other cat bond in our extensive Artemis Deal Directory.

Read all of our interviews with ILS market and reinsurance sector professionals here.