Validus sponsoring $325m Tailwind Re 2017 catastrophe bond

by Artemis on December 7, 2017

Bermudian reinsurance group Validus Holdings is sponsoring its first full catastrophe bond issuance with the launch to the ILS market of a $325 million Tailwind Re Ltd. (Series 2017-1) transaction, as it seeks to add more capital markets backed retrocession to its coverage.

The fact a major reinsurer is turning to the catastrophe bond market for retro at this time could be a sign that the ILS market and cat bond investors are set to offer keen pricing at a time whan other retro markets are seeking steep price increases on their products.

Catastrophe bond issuance since the major hurricanes has pointed to just a 5% to 15% risk adjusted price increase, which is below the discussions of 20% to 40% price rises that traditional markets have been slating for retrocessional reinsurance.

So it’s encouraging to hear that Validus is choosing this juncture to enter the cat bond market with its first deal and we could see other major players follow suit in time.

Tailwind Re Ltd. is a newly formed Bermuda special purpose insurer (SPI) established to issue series of catastrophe bond notes for the sponsor.

In this first issuance, Tailwind Re Ltd. will offer three tranches of Series 2017-1 notes to cat bond investors, proceeds from the sale of which will be used to fully collateralized underlying reinsurance agreements with Validus companies.

We’re told that the transaction will provide retrocession and reinsurance to Validus Re, Talbot Underwriting and its syndicate at Lloyd’s of London, Western World and other Validus Holdings subsidiaries.

The Tailwind Re 2017-1 cat bond will provide the company with a capital markets backed source of collateralized reinsurance and retro covering the multiple perils of U.S., Canada, Puerto Rico and U.S. Virgin Islands named storms and earthquakes.

The reinsurance protection from the Tailwind Re 2017-1 cat bond will run for a four-year period, protecting Validus on an annual aggregate basis and using a weighted PCS industry loss index trigger.

Three cat bond tranches will be issued by Tailwind Re, all with different levels of risk and return for investors, but covering the same perils and territories on an industry loss basis, we understand.

A $125 million Class A tranche of notes have an initial attachment point of 3.79%, expected loss of 3.41% and are offered to ILS investors with price guidance of 7.75% to 8.5%.

A $125 million Class B tranche of notes are a little riskier, having an initial attachment point of 5.11%, expected loss of 4.43% and are offered to cat bond investors with price guidance of 9.5% to 10.25%.

The final $75 million Class C tranche are the riskiest, with an initial attachment point of 6.24%, expected loss of 5.64% and are being offered to cat bond investors with coupon price guidance of 11.5% to 12.5%.

We are told that each tranche will require an initial franchise deductible to be met before industry losses begin to accumulate to the index. We’re also told that this Tailwind Re cat bond would have faced losses during the Katrina, Rita, Wilma year of 2005, when the riskiest tranche would have paid out in full and the mid-risk tranche would have seen some loss of principal.

Retro cat bonds like this, that are triggered on an aggregate industry loss basis, provide value reinsurance protection to sponsoring re/insurance groups like Validus. This year they are proving their worth, with a number set to pay out or at risk due to recent catastrophe events.

With catastrophe bond market pricing set to remain efficient, it’s possible we could see more major re/insurers turn to the cat bond market in this way.

We’ll update you as the Tailwind Re Ltd. (Series 2017-1) catastrophe bond from Validus proceeds to market and you can read about this and every other cat bond in the Artemis Deal Directory.

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