Market Re 2016-5, first temperature cat bond since 1999 launched

by Artemis on July 27, 2016

A new catastrophe bond has been launched which aims to be the first to cover temperature related weather risks since 1999, as sponsor Allianz Risk Transfer seeks $70m of coverage against European winter temperature extremes through a Market Re Ltd. (Series 2016-5) deal.

For this novel catastrophe bond (or weather bond), which according to our records is the first in almost 17 years that seeks to cover temperature related weather risks, sponsor Allianz Risk Transfer is working with the Jardine Lloyd Thompson Capital Markets (JLTCM) ILS structuring and issuance team. As a result, the cat bond will be issued privately through JLTCM’s Market Re issuance platform as a Market Re 2016-5 offering, we understand from sources.

Allianz Risk Transfer, the specialist alternative risk transfer and fronting arm of global insurance and reinsurance group Allianz, has been busy in the cat bond market in recent weeks, with a $185m Blue Halo Re Ltd. (Series 2016-1) completed in June and a $225m Blue Halo Re Ltd. (Series 2016-2) completed in July.

It’s interesting that the latest venture into the catastrophe bond market from Allianz Risk Transfer is a temperature related transaction. As we’ve noted, Allianz ART works closely with ILS manager Nephila Capital and one area the pair collaborate is on weather risk transfer, so there is a chance that some of the risks being transferred through this cat bond are related to risk retained by Allianz ART.

On to the transaction itself. Details are relatively limited, as this transaction is being privately arranged and placed with investors with the help of the JLTCM team. So we only have some basic details that we’ve received from market sources.

The Market Re Ltd. special purpose vehicle, which is managed by specialist insurance and ILS manager the Horseshoe Group for JLTCM, will seek to issue and sell to investors two tranches of Series 2016-5 notes, with the aim of providing sponsor Allianz Risk Transfer with a source of fully-collateralised reinsurance protection. The protection is set to run for almost three years, across three risk periods, we’re told.

The Market Re 2016-5 issuance involves a $30m tranche of Class A notes and a $40m tranche of Class B notes, with both tranches exposed to the risks of warmer winter temperatures across five key weather measurement points in the continent. The five locations where temperatures will be measured are London, UK; Paris, France; De Bilt, Netherlands; Prague, Czech Republic and Frankfurt, Germany.

Weather data will be collected from these weather stations and used to construct an index, against which the transaction can be triggered and the size of any payouts calculated. As such the notes feature what could be termed either a parametric or weather-index trigger, with both tranches providing aggregate coverage per pre-defined calculation period.

The two tranches will sit on top of each other but will provide cascading protection, with one dropping down to replace the other as it is eroded by aggregate losses, we are told. Essentially the notes will only be on risk during the winter months, as they are designed to provide reinsurance cover for exposure to warmer winter temperatures.

With Allianz providing insurance and risk transfer products that are weather linked, to the likes of energy, power generation, wind farms, as well as weather products to corporates and industrial clients, acquiring a source of protection from the capital markets to protect itself against larger losses should winter be exceptionally warm, makes perfect sense.

It is possible that the ILS market may be the most efficient market to place this risk into as well, with traditional reinsurance markets sometimes lacking the capacity and flexibility to provide weather risk coverage at as keen a price as the capital market can be willing.

We’re told that the $30m of Market Re 2016-5 Class A notes are the least risky, and this is reflected in price guidance of 4.5% to 6% for the tranche. Meanwhile, the Class B notes that sit beneath are being offered with price guidance of 13% to 15%, reflecting a higher level of risk.

As a privately placed cat bond transaction, we’d imagine the investors will perform their own risk modelling and hence the transaction does not come with the typical metrics of expected loss or attachment probability, as investors will look to calculate their own view of the risks involved.

That makes issuance an efficient process, as does the fact that the Market Re cat bonds from JLTCM are not full-blown 144A issuances, thus saving some of the transaction overheads associated with cat bond deals.

The Jardine Lloyd Thompson Capital Markets team will be acting as sole structuring agent and bookrunner, as it does on all the Market Re private cat bond deals.

It’s encouraging to see a weather risk cat bond come to market, as the vast amount of exposure to weather variability around the world suggests a capital markets solution is an appropriate way to provide the necessary risk capital to cover it.

The structure in this weather risk securitisation seems a flexible mechanism and trigger, that provides cover against temperature extremes across a number of countries, thus suiting a large sponsors portfolio such as Allianz.

It will be interesting to see whether this could stimulate some interest from other carriers in using a catastrophe bond structure as a way to acquire reinsurance for weather risks, such as temperature or maybe even rainfall.

The capital and ILS markets are well-suited to understanding, being able to price and taking on these kinds of weather risk, hence given the appetite among ILS funds and investors for new cat bond issuance there could be an opportunity for carriers to bring a new and diversifying group of transactions to the market.

For those interested, the last temperature linked catastrophe bond deal that we covered was back in November 1999 when the Koch Energy Trading group sponsored the Kelvin Ltd. bond to provide reinsurance for a basket of weather derivative contracts.

The Market Re Ltd. (Series 2016-5) weather risk catastrophe bond deal is expected to complete in August and we’ll update you as and when information becomes available. You can read all about this and every other cat bond in the Artemis Deal Directory.

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