$250m Spectrum Capital cat bond launched for Tokio Millennium Re

by Artemis on May 31, 2017

A new $250 million Spectrum Capital Ltd. (Series 2017-1) catastrophe bond has been launched to the ILS investor community, we understand, with the issuance set to provide a collateralized source of multi-peril risk transfer protection to sponsoring reinsurer Tokio Millennium Re (Bermuda).

Tokio Millennium Re has only featured in our Deal Directory of catastrophe bond transactions twice before, with two private cat bond lite type deals where it may not have been the beneficiary anyway, as these could have been transacted on behalf of a cedent and a capital markets investor.

This time it looks like the Tokio Millennium Re AG Bermuda branch is set to be the beneficiary of around $250 million of reinsurance protection, as it acts as the risk transfer counterparty for this new Spectrum Capital Ltd. cat bond deal.

We’re told that newly formed Bermuda special purpose insurer Spectrum Capital Ltd. will look to issue two tranches of Series 2017-1 notes, which will be sold to capital markets investors to raise a targeted $250 million in funds to collateralize two underlying reinsurance agreements, which we’re told will be structured to offer derivative-style protection and run for almost four years.

The coverage provided to Tokio Millennium Re by the Spectrum Capital 2017-1 cat bond will be against losses from U.S. named storms, earthquakes, severe thunderstorms, wildfires, winter storms, and Canada earthquakes.

A Spectrum Capital Series 2017-1 Class A tranche of notes is targeting $100 million of protection for Tokio Millennium Re and will provide its coverage on an annual aggregate basis. A Class B tranche of notes targets $150 million of coverage, and is structured to provide per-occurrence coverage for second and subsequent loss events, we understand.

Both tranches of notes will utilise an industry loss trigger, based on PCS reported insurance market losses for covered events. The Class B tranche will only become activated after a first qualifying loss is reported and it seems only be activated for a set two year period (except for in the final annual risk period), after which it would take another two events to trigger these notes.

The $150 million of Class A, annual aggregate and industry loss triggered notes that will be issued by Spectrum Capital have an initial attachment probability of 3.64%, expected loss of 2.72% and are being marketed to cat bond investors with price guidance in a range from 6% to 6.75%, we are told.

The $100 million of Class B, second and subsequent event and industry loss triggered notes, have an annualised attachment probability across the term of the deal of 0.89%, an expected loss of 0.69% and are offered with coupon guidance from 3.25% to 4%.

Tokio Millennium Re in Bermuda is a provider of large, customised reinsurance and risk transfer solutions, and also helps ILS funds or investors to access risk, either by facilitating the connecting of risk to capital, or by providing tail-risk and stop-loss reinsurance solutions to help companies better control the risks they are assuming.

As such, the company likely holds a broad exposure to industry loss events, making a derivative style, industry loss triggered cat bond suitable as a source of retrocessional reinsurance, rather like an industry loss warranty (ILW) might be.

It’s encouraging to see Tokio Millennium Re looking to utilise the catastrophe bond market for a large slice of risk transfer and reinsurance. The Spectrum Capital deal brings another potential repeat sponsor to the market, which could result in more regular issuances.

This new $250 million targeted Spectrum Capital Ltd. (Series 2017-1) cat bond is set for completion sometime in June. You can read all about this and every other catastrophe bond in the Artemis Deal Directory.

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