Regular catastrophe bond sponsor, French reinsurer SCOR, are returning to the cat bond market for another Atlas issuance. The latest Atlas cat bond see’s them revert back to the original naming convention that they began their ILS market ventures with, using an issuing entity named Atlas Reinsurance VII Limited. The ninth cat bond transaction in our Deal Directory from SCOR to use the Atlas name, Atlas Reinsurance VII see’s SCOR seeking a three-year source of fully-collateralized multi-peril retrocessional reinsurance.
It’s encouraging to see SCOR returning for their annual Atlas cat bond deal. Usually Atlas is issued in December, with the risk period starting in line with the January renewals. This deal is launching now, but has a risk free few months before it comes on-risk at the start of January. That’s interesting as it could signal that SCOR feel that pricing in the cat bond market right now is so attractive they may be better to market their deal before too many other issuances come along and soak up available investor capital. A very sensible move in the current climate of high investor appetite and low primary issuance. Also, it appears that investors will receive their interest coupon payments even during the risk free period, which should make this even more attractive to them.
SCOR used to use the Atlas Re or Atlas Reinsurance naming convention on their early Atlas cat bonds, but since 2008 started to call the entities Atlas xx Capital etcetera. Now they have reverted back to the original naming convention with Atlas Reinsurance VII Ltd. The entity itself, Atlas Reinsurance VII Limited is an Irish domiciled special purpose reinsurance vehicle, meaning SCOR sticks with its preferred ILS domicile of Dublin, Ireland. The notes it issues in this transaction will be used to collateralize two reinsurance agreements with SCOR.
Our sources tell us that the Atlas Re VII cat bond deal will involve the issuance of two tranches of notes, seeking $115m of cover at least (there’s a good chance this will upsize). As with most cat bond deals, the sponsor will leave the total size of the transaction open until they have assessed investor appetite for the deal. Atlas Reinsurance VII offers a degree of diversification so should prove quite popular.
The first, Class A tranche of notes has a preliminary size of $50m and will provide cover for qualifying U.S. hurricane and U.S. earthquake risks on an annual aggregate basis. The trigger for the Class A tranche of notes will use a county weighted industry loss index from PCS.
The Class B tranche of notes is denominated in Euros and has a preliminary size of €50m. It will provide cover for SCOR’s European windstorm risk on a per-occurrence basis. The trigger for the Class B tranche of notes will use a PERILS Cresta zone weighted industry loss index.
It’s interesting that SCOR are marketing tranches denominated in different currencies. We’re not 100% sure why this is but it could be for accounting purposes to ensure that the risk matches up closely with the exposures given that the U.S. exposures will be in dollars and the European in Euros.
The Atlas Reinsurance VII catastrophe bond will not come on-risk until the 1st January 2013 with the risk period expected to run until the end of 2015, so providing SCOR with a three-year source of cover on both an aggregate and per-occurrence basis.
The Class A notes cover the U.S. hurricane and earthquake perils. They provide hurricane cover for the U.S. eastern (including Florida) and gulf coast hurricane exposed states as well as for Puerto Rico. The earthquake cover is for across all 48 contiguous U.S. states and the District of Columbia. The notes have an index attachment point of 685 and an index exhaustion point of 785. These notes are annual aggregate in nature, meaning that they cover frequency events as well as single large events. So a number of qualifying hurricanes and earthquakes, including a mix of the two, could contribute to the index value over the course of each of the three-year risk period. The index values for this tranche will be reset at the end of each annual risk period. For a hurricane or earthquake catastrophe event to qualify it must have a PCS catastrophe number assigned to it. For hurricane events we’re told that a qualifying event could actually just be a tropical storm as long as it causes sufficient industry losses to warrant being given a PCS catastrophe number. The Class A notes attachment probability is 2.09%, expected loss is 1.86% and exhaustion probability is 1.64%.
The Class B notes provide SCOR with European windstorm cover for Belgium, Denmark, France, Germany, UK, Ireland, Netherlands, Luxembourg, Switzerland, Norway and Sweden. The attachment point for these notes is 575 on the PERILS calculated industry loss index, while the exhaustion point is 675. These notes provide their cover on a per-occurrence basis, meaning that they can only be triggered by a single storm meeting the industry loss index trigger point and which was severe enough to generate a PERILS industry loss report. The Class B notes have an attachment probability of 1.75%, expected loss of 1.50% and exhaustion probability of 1.30%.
The Atlas Reinsurance VII cat bond transaction is being structured by Aon Benfield Securities. Joint bookrunners for the deal are Aon Benfield Securities, BNP Paribas and Natixis. AIR Worldwide are risk modelling and calculation agent.
The collateral resulting from the sale of the notes will be split according to denomination and invested in EBRD notes, dollar denominated for the Class A tranche and Euro denominated for the Class B tranche.
As we said, it’s possible that SCOR are bringing this deal to market now, with the risk free few months before it comes on-risk in January, in an effort to leverage the attractive pricing seen in recent cat bond deals. Every recent cat bond has priced at or below the lower end of guidance, and SCOR must be hoping this trend continues as it makes cat bond cover much more competitively priced with traditional sources of reinsurance or retro. According to our sources, the price guidance for Atlas Reinsurance VII shows that the Class A tranche is expected to price somewhere between 8.25% and 9.00% while the Class B notes show a range of 3.65% to 4.15%.
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