Another milestone has been reached for the catastrophe bond and insurance-linked securities (ILS) market, with the introduction of the first cat bond covering Chinese perils. The Panda Re Ltd. (Series 2015-1) deal covers Chinese quake risks on an indemnity basis.
Details on the transaction are limited due to this being a privately placed Rule 4(a)(2) transaction, however discussions with market contacts have provided us with enough to get this groundbreaking deal listed as the first China cat bond in the Artemis Deal Directory.
Panda Re Ltd. will be registered as a Bermuda domiciled SPI, we understand, aiming to issue a single tranche of Series 2015-1 notes to collateralized underlying reinsurance contracts for the cedent or sponsor.
The sponsor is the Chinese state-owned reinsurer China Property and Casualty Reinsurance Company, more commonly known as China Re. It’s not surprising to see the first cat bond come from a state-backed reinsurer rather than a private entity. The Chinese government and State Council has expressed a desire to see a functioning cat bond market emerge in China to transfer peak catastrophe risks to the capital markets.
For this transaction, China Re is seeking between $50m and $70m of protection, with $70m the preferred figure we understand. Panda Re will cover losses suffered from earthquakes across all of the People’s Republic of China, but excluding Hong Kong and Macau.
The Panda Re 2015-1 catastrophe bond will use an indemnity trigger and losses will be on a per-occurrence basis.
It’s particularly interesting that this deal has come to market with an indemnity trigger, given most discussion of Chinese cat bonds has revolved around the potential for parametric triggers.
There has always been some concern about the loss calculation process for indemnity covers in China, but it seems the market may be ready to accept Chinese quake risks on an indemnity basis now. It’s also a little unusual to see indemnity for what is essentially retrocession, although China Re does also own insurance companies.
The Panda Re 2015-1 cat bond will have a three-year term, with inception targeted for the 1st July 2015 we understand.
China Re is seeking to secure between $50m and $70m of cover from this Panda Re cat bond and we understand that the reinsurer came to market with a range of layer options that it would like to secure this coverage for.
Panda Re has been launched alongside the China Re reinsurance renewal we believe, so by giving investors a number of options to show interest in the reinsurer is able to test the appetite of the capital markets for Chinese quake risks in cat bond form while also comparing that appetite to traditional reinsurance capital sources.
The cat bond was marketed with six layer options, we understand, but the consensus from the ILS and cat bond investor community is said to have converged on a layer that would attach at 2.1 billion Chinese Yuan, which equates to roughly USD$340m.
We’re told that the layer will likely be either 400m or 800m Chinese Yuan in size, meaning the notes issued by Panda Re will just cover a percentage of China Re’s losses within that layer.
We understand that the book had been coming together to support this attachment level, with an attachment probability of 2.61%, an expected loss of 2.12% and risk spread pricing of 4.1%. China Re is seeking between $50m and $70m of cover at this level, with the $70m preferred.
It’s a low coupon and a low multiple of around 1.93 times the initial expected loss, however this is aligned with other diversifying risks which may attract cat bond fund managers. Some ILS investors are likely to forgo the opportunity to invest in Panda Re, as it is a low coupon, but the diversification it offers to others could make it an attractive opportunity.
GC Securities is involved in bringing the Panda Re cat bond to market, but at this time we’re unsure exactly what roles the capital markets broker is playing. We understand that investors are undertaking their own risk analysis on this deal, but risk modelling firm RMS is providing reset agent services.
The notes will be transferable in the secondary market, with them expected to be listed on the Bermuda Stock Exchange (BSX) in the coming days. At that time we may have a clearer picture of the final size of the transaction.
Given the limited information and also the late arrival of this transaction we’ll be including it in our third-quarter catastrophe bond market report, although likely with limited information at this time.
It’s encouraging to see the first Chinese catastrophe bond come to market and it will be interesting to see how investor appetite responds. We’ll try to update you as and when any further details or information becomes available.
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