Global insurance firm American International Group (AIG) is returning to the catastrophe bond market for its third Tradewynd deal, seeking at least $300m of reinsurance protection from the capital markets with Tradewynd Re Ltd. (Series 2014-1).
AIG has become a regular visitor to the cat bond and insurance-linked securities (ILS) market, with this new transaction actually being the firms seventh cat bond issue since 2010. The deals have come with different sponsor names behind them, as you might expect with AIG’s recent history, but they demonstrate a commitment to leveraging the ILS and capital markets increasingly as a source of reinsurance cover.
For reference, the six previous AIG backed cat bonds were, Lodestone Re Ltd. (Series 2010-1), Lodestone Re Ltd. (Series 2010-2), Compass Re Ltd. (Series 2011-1), Compass Re Ltd. (Series 2012-1), Tradewynd Re Ltd. (Series 2013-1) and Tradewynd Re Ltd. (Series 2013-2).
With Tradewynd Re Ltd. (Series 2014-1) AIG is seeking at least $300m of fully-collateralized reinsurance protection, through the issuance of three tranches of cat bond notes, Artemis understands. All three tranches of notes will provide AIG with reinsurance cover on an indemnity and per-occurrence basis, with two tranches providing their cover over a three-year risk period, while one has a one-year risk period.
The coverage is for similar perils as the previous Tradewynd Re cat bonds. Named storms (so tropical storms and hurricanes) are covered across the U.S., Canada, Mexico, most of the Caribbean, Gulf of Mexico and the District of Colombia. Earthquake risks are covered across the U.S., Canada, Mexico, most of the Caribbean and the District of Colombia.
Two of the Series 2014-1 tranches of notes being issued by Tradewynd Re are riskier than those issued in the previous deals, sitting below them in AIG’s reinsurance tower, we understand. The third tranche will sit alongside the other Tradewynd deals, but with a drop-down feature allowing the coverage to move down a layer should the cat bond tranches beneath be exhausted.
A Class 1-B tranche of notes will sit at the lower level, below the older Tradewynd cat bonds and are the tranche with a one-year risk period through 2015. This tranche, as yet unsized we understand, has an attachment probability of 3.35%, an exhaustion probability of 1.43% and an expected loss of 2.2%. These notes attach at $3 billion of qualifying losses to AIG up to $4.5 billion.
A Class 3-A tranche of notes, with a three-year risk period, sits at the same level of the older Tradewynd cat bonds. This tranche attaches at $4.5 billion of losses to AIG up to $5.5 billion, but has a drop-down feature allowing them to move down to a $3 billion attachment point. The probability of attachment is 1.43%, the exhaustion probability is 0.91% and the expected loss is 1.14%.
The final tranche, Class 3-B, sits at the same level as Class 1-B but beneath 3-A, making this the tranche that if eroded would see the 3-A tranche drop down to replace it, we understand. These notes attach at $3 billion of losses up to $4.5 billion, with an attachment probability of 3.35%, an exhaustion probability of 1.43% and an expected loss of 2.2%. These notes have a three-year risk period as well.
So, the one year tranche seems almost an extension of the cover provided by the Class 3-B notes for the first year, but with the Class 3-B notes being replaceable by the Class 3-A should they be eroded as well. This will give AIG more first-year cover across the lower level of its programme, at $3 billion of losses to the insurer, while the drop-down could then be activated should that all be exhausted.
As with its other Tradewynd Re catastrophe bonds, AIG is seeking cover for a diverse portfolio of underlying risks again with this deal. We understand that as with the previous Tradewynd’s this 2014-1 cat bond will cover both personal lines consumer insurance policies as well as commercial insurance lines of business.
The commercial book contains such covered business lines as commercial property, energy, marine and engineering risks. As with previous Tradewynd’s, note the clever inclusion of energy risks with coverage of the Gulf of Mexico for hurricanes. The personal coverage covers lines of business such as residential coverage, high net worth personal lines, auto physical damage, yacht and fine art and collections and excess and surplus business.
With its Tradewynd Re cat bonds AIG is sensibly covering large portions of its book, likely in areas that the firm is seeking growth as well, using capital markets protection as a capital tool as well as protection. ILS investors are by now familiar with these deals and the diverse range of risks included in them, so we expect to see broad support for AIG’s latest deal.
In terms of pricing, we understand that the one-year tranche of Class 1-B notes are being marketed with price guidance of 6.5% to 7.5%, the Class 3-A tranche which sit higher up and feature the drop-down have price guidance of 4.75% to 5.5% and the Class 3-B notes sitting beneath 3-A have guidance of 6.5% to 7.5%.
The pricing would point towards multiples of just above 3 times expected losses for all tranches of notes, should they price around the mid-point of initial coupon price guidance.
Of course, with three cat bonds under its belt from Tradewynd and still in force, we have the opportunity to compare where pricing has gone in the market once again. The best comparison is between the 2013-1 Class 1 notes, the 2013-2 Class 3-B notes and the 2014-1 Class 3-a notes, as all attach at $4.5 billion of losses to AIG.
The 2013-1 Class 1 notes priced at 8.25%, then the 2013-2 Class 3-B notes priced at 7% and now the 2014-1 Class 3-A notes are marketed with guidance of 4.75% to 5.5%. So even at the top end of that guidance the latest deal would price 20% below the 2013-2 transaction, for the same level of risk. At a year later in terms of issuance and considering the price declines across the ILS, cat bond and reinsurance market, a decline in pricing of 20% seems aligned with experience across the reinsurance market in the last year.
We’re told that Swiss Re Capital Markets are joint structuring agent and lead bookrunner, while Aon Benfield Securities are joint structuring agent, Deutsche Bank Securities are joint lead manager and AIG Global Capital Markets Securities is placement agent. RMS is providing risk modelling services for the deal.
This transaction is slated to be completed during the month of December, so will add to the 2014 issuance total which is now rising towards the $8 billion mark, once all deals are completed.
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