Calypso Capital II Ltd. (Series 2013-1)

This €350m (US$474m) deal sees the insurer return to the cat bond market with a newly formed Irish special purpose vehicle, Calypso Capital II Limited. This first deal under Calypso Capital II will see AXA looking to secure a multi-year source of fully-collateralized European windstorm coverage from the capital markets for its AXA Global P&C subsidiary.

The transaction has a preliminary size of €200m, we understand, with two tranches of notes being marketed to capital markets investors. Both tranches of notes will be exposed to European windstorms on an industry loss basis, with PERILS AG acting as a reporting agency providing a CRESTA zone and line of business weighted industry loss index. Protection from both of the tranches is on a per-occurrence basis and the deal covers both first and subsequent qualifying European windstorm events.

A €100m Class A tranche of notes has an attachment probability of 1.45%, an exhaustion probability of 0.61% and an expected loss of 0.96%. The attachment point is at €2.11 billion on the PERILS weighted industry loss index up to an exhaustion point of $3 billion.

A €100m Class B tranche of notes is a little riskier, with an attachment probability of 2.11%, an exhaustion probability of 0.62% and an expected loss of 1.18%. The attachment point for these notes is at €1.78 billion on the PERILS weighted industry loss index up to an exhaustion point of $3 billion.

The tranches of notes have differing risk periods we understand. The Class A notes will run for three years from the 1st January 2014 up to the end of 2016, but the Class B notes have a longer term of four years, running to the end of 2017.

Also of interest is the fact that again AXA has chosen to market its cat bond in advance of the risk period beginning.

We understand that a token interest coupon will be paid to investors up until the risk period proper begins in January. This is a clever way to get a cat bond out to an investor audience which right now does not have a lot of transactions to review, rather than aiming to market it at the end of the year when the pipeline will be much busier.

Both tranches of notes have variable reset features. The Class A notes can be reset within pre-defined limits (of attachment and expected loss) if the sponsor elects to, with the interest spread being adjusted as well so investors are compensated. The Class B notes have a mandatory variable reset clause, meaning that they must be adjusted and will become more risky for the second annual risk period. This gives the sponsor the guarantee of where that protection will sit within its reinsurance program a year down the line from issuance and could help it save money on that layer should reinsurance prices rise.

Following a reset, the one-year probability of attachment can increase to as high as 2.05% for the Class A notes and 3.20% for the Class B notes.

In its ratings review Standard & Poor’s explains the loss calcualtion process for the cat bond:

If a European windstorm occurs during the risk period and the calculation agent confirms that it resulted in an industry loss index equal to or above €2.11 billion for the class A notes and €1.78 billion for the class B notes, it is considered a covered event. For each covered event, the calculation agent will calculate the event index value using the following method: 1) For a Europe windstorm event, obtain the estimated industry insured losses by line of business for each CRESTA zone in the covered area from the reporting agency. 2) For each class of notes, apply the relevant payout factors and currency conversion factors, as applicable, to the reporting agency’s estimated insured losses by line of business for each CRESTA Zone in the covered area. 3) Determine the Europe windstorm index value for each class of notes by summing the resulting values from step 2 in each CRESTA zone or line of business in the covered area of the respective class. 4) For each class of notes, determine the Europe windstorm event percentage using the following formula: (Europe Windstorm Index Value – Attachment Level)/(Exhaustion Level – Attachment Level). The Europe windstorm event percentage is floored at 0% and capped at 100%. 5) Multiply (A) the aggregate event percentage (the smaller of (i) the sum of the Europe windstorm event percentages for all Europe windstorm events and (ii) 100%) of such class at a payment date minus the aggregate event percentage of such class as of the immediately prior payment date by (B) the original principal amount of such class.

We understand that the countries covered under this cat bond will be Belgium, Denmark, France, Germany, Ireland, Luxembourg, The Netherlands, Norway, Sweden, Switzerland and UK. These are the most European windstorm exposed nations for AXA, with the highest insured exposures. For AXA itself France will make up the largest exposure in this cat bond followed by the UK and then Germany.

S&P noted in their review of the transaction that were the Class B notes to be reset to their highest probability of attachment then the December 1999 European windstorm Lothar event could have triggered them.

We understand that the Class A notes are being marketed to investors with price guidance of 2.6% to 3.1%, while the Class B notes have pricing guidance of 2.9% to 3.4%.

Update: Strong investor demand has helped AXA upsize this cat bond by 75% and the transaction is now offering €350m (approximately $476m) of notes to investors.

The deal has gone from two tranches of €100m, to a Class A tranche of €185m and a Class B tranche of €165m.

Price guidance has dropped to the bottom of the marketed range for both of the tranches, we understand. The Class A tranche has seen its guidance tighten from a range of 2.6% to 3.1% to now offer notes at 2.6%. The Class B notes were marketed at 2.9% to 3.4% and now look set to price offering investors a return of 2.9%.