American International Group (AIG) is returning to the catastrophe bond market in search of a new source of fully-collateralized reinsurance protection for its subsidiaries and affiliates with Tradewynd Re Ltd. (Series 2013-1), according to market sources. It will be the fifth time that AIG companies have issued a cat bond to source reinsurance protection from the capital markets.
The four other AIG company cat bonds were issued under National Union Fire Insurance Co. of Pittsburgh with Compass Re Ltd. (Series 2012-1) and Compass Re Ltd. (Series 2011-1), and under Chartis with Lodestone Re Ltd. (Series 2010-2) and Lodestone Re Ltd. (Series 2010-1). Tradewynd Re is the first cat bond to officially be marketed with the AIG branding as the sponsor.
Tradewynd Re Ltd. is a recently registered Bermuda domiciled SPI established to issue series of cat bond notes to benefit AIG’s various subsidiaries with catastrophe bond protection from the capital markets. In this first issuance from Tradewynd Re, a single tranche of Series 2013-1 Class 1 notes is being offered with a preliminary size of $100m, we understand.
The cat bond notes issued under Tradewynd Re Ltd. will be used to collateralize a source of multi-year reinsurance protection for AIG companies. The protection will be for named storms (so tropical storms and hurricanes) and also for earthquake risks and the deal will run for a five-year risk period.
We understand that the underlying book of business is extremely diverse and includes both personal lines consumer policies as well as commercial insurance. The personal lines book includes residential coverage across the U.S. and Caribbean as well as items such as high net worth residential, auto, yacht and fine art. The commercial book covers diverse risks from commercial property, to energy risks, engineering risks, marine and aerospace.
The diverse book of business makes the covered area for this cat bond particularly relevant. The named storm protection is for the hurricane exposed states of the U.S., the Caribbean and interestingly also the Gulf of Mexico. It’s interesting that the Gulf of Mexico is named specifically as the commercial business the deal covers includes some energy risks, so perhaps with this cat bond cover is being provided for some of AIG’s Gulf of Mexico drilling and refining risks. Earthquake coverage is for the U.S., District of Colombia and Canada.
Perhaps unsurprisingly, given the diverse nature of the underlying business, this transaction will use an indemnity trigger and protection is on a per-occurrence basis. We understand that the attachment point is at $4.5 billion of indemnity losses and the exhaustion point is at $5 billion of losses. With a $500m layer of the reinsurance tower included in this deal it will be interesting to see how large the transaction gets and whether AIG can secure that whole layer from the capital markets through Tradewynd Re.
We understand that the notes have an attachment probability of 1.6%, an expected loss of 1.43% and an exhaustion probability of 1.3%. The notes are being offered with a coupon price guidance range of 7.25% to 8.25% we’re told.
Finally, this Tradewynd Re cat bond features a variable reset feature which would allow the sponsor to adjust the protection the notes provide it. The attachment level can be adjusted within specified bounds, allowing the cover to move up or down the reinsurance tower and the interest spread would then be adjusted to compensate investors for either the increased or reduced risk. This feature is becoming more common in cat bonds and makes a lot of sense for the sponsors.
We understand that the deal is being jointly structured by Aon Benfield Securities and GC Securities and jointly marketed by bookrunners Aon Benfield Securities and BNP Paribas. AIR Worldwide is providing risk modelling and post event loss calculation services.
We hope to bring you more detail on this cat bond as it comes to market. We’re told that the diverse book of business covered in this deal is a little unusual and sees new types of property risk being brought to the cat bond market for the first time.
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