Insurance firm AIG has reset its most recent multi-peril catastrophe bond, Tradewynd Re Ltd. (Series 2014-1), at a slightly higher probability of attachment for the second risk period, resulting in a slight increase in the risk interest spread paid to investors.
AIG’s Tradewynd Re 2014-1 was a $500 million, triple tranche catastrophe bond, providing the insurer with collateralized reinsurance protection against certain losses from U.S., Canada, Mexico, Caribbean, Gulf of Mexico and D.C. named storms, as well as U.S., Canada, Mexico, Caribbean and D.C. earthquakes events.
One of the tranches of the Tradewynd Re 2014-1 cat bond is soon to mature, having only been had a 1 year duration. Fitch Ratings affirmed the rating on the $100 million of Class 1-B notes, saying that “Assuming no triggering events occur between now and Dec. 31, 2015 and investors are repaid in full on Jan. 8, 2016, Fitch expects to mark the class 1-B notes as paid in full on that date.”
With the first risk period now nearly over, Fitch Ratings noted that the two other tranches have also have their ratings affirmed; “There were no reported Covered Events that exceeded the Initial Attachment Levels of the class 3-A and class 3-B notes within the First Annual Risk Period from Jan. 1, 2015 through Dec. 15, 2015.”
AIG opted to utilise the variable reset facility for the $100 million Class 3-A and $300 million Class 3-B notes, to take into account changes in the covered property exposure data and also its inuring reinsurance layers.
This has resulted in a slight increase in the attachment probability for both tranches for the second risk period. The Class 3-A notes had an initial attachment probability of 1.43%, which is to be increased to 1.6%. The Class 3-B began with an attachment probability of 3.35% and that is being increased to 3.67%. Both changes take effect for the second annual risk period running from 1st January 2016 to 31st December 2016.
Fitch Ratings explained; “These probabilities reflect updated property exposure data as of June 30, 2015 and inuring reinsurance as of Sept. 15, 2015, within the Subject Business in the Covered Area using the escrowed RMS model.”
The attachment and exhaustion levels have not been changed however, just the probability of the attachment being reached, reflecting slightly higher levels of risk.
What has changes is the compensation investors receive for holding the notes, now that they have become slightly more risky.
The Risk Interest Spreads (or coupons) that investors will receive have increased for both of the tranches. The Class 3-A notes coupon will increase to 5.31%, from the initial 5.0%, while the Class 3-B will increase to 7.45% from the initial 7.0%. This reflects an increase in the expected loss, with the sensitivity case rising to 1.42% (from 1.25%) for the class 3-A notes and 2.69% (from 2.41%) for the class 3-B notes, Fitch explains.
So this is a great example of the variable reset in action, providing the sponsor AIG with a way to account for changes to its covered property exposure and its other reinsurance provisions, which is reflected in the riskiness of the Tradewynd Re 2014-1 cat bond and subsequently the interest paid to investors.
The variable reset provision is now a common feature of practically all catastrophe bond issues, with sponsors benefiting from the added flexibility that it provides over the duration of their transactions coverage.
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