Galileo Re Ltd. (Series 2016-1)

While sponsored by XL Insurance (Bermuda) Ltd., the Galileo Re 2016-1 cat bond will cover losses from a range of XL Group entities, from insurers to reinsurers and Lloyd’s syndicates, whether XL or Catlin branded subsidiaries, so effectively losses suffered by the group.

We understand that the Galileo Re 2016-1 cat bond will seek cover for XL for the same range of perils as the previous two cat bonds, namely U.S. named storms, U.S. earthquake, Canada earthquake, European windstorm.

This 2016-1 issuance from Galileo Re is split into three tranches of notes, we understand, with each covering a different layer of the XL reinsurance and retro program. All three tranches will provide protection for each of the covered perils on an annual aggregate and industry loss trigger basis. The transaction will run for three annual risk periods to the end of 2018.

U.S. named storm, U.S. earthquake and Canadian earthquake coverage will be triggered based on a PCS weighted industry loss index, while European windstorm protection will use a PERILS AG weighted industry loss index. Coverage for all perils is for the typical states and countries where exposure is highest to each peril, we understand.

The three tranches of notes sit on top of each other, to ultimately provide coverage across a layer that attaches at $200 million of losses up to an exhaustion of coverage at $800 million of losses. All three tranches feature a $40 million per event deductible, we’re told.

A $100 million Class A tranche of notes is the riskiest, attaching at $200 million and exhausting at $400 million. A $100 million Class B tranche then attaches at $400 million and runs up to exhaustion at $600 million. Finally, A $100 million Class C tranche attaches at $600 million and exhausts at $800 million.

Of course that structure would give XL the opportunity to upsize the transaction significantly, if it found market conditions conducive and wanted to, to cover the entire $600 million layer of its program through the capital markets with this cat bond.

Given how low the Class A tranche attaches it has a high probability of attachment, initially at 12.74%, with an expected loss of 8.66% at the base case or 9.52% at the WSST sensitivity case. This tranche is being marketed with price guidance of 13.75% to 14.25% we’re told.

The Class B tranche has an initial attachment probability of 5.9%, with an expected loss of 4.57% base or 4.96% sensitivity. This tranche will offer a coupon in the range of 9.25% to 9.75%.

Finally the Class C notes have an initial attachment probability of 3.55%, so the least risky, with an expected loss of 2.85% base or 3.09% sensitivity. This tranche is marketed with pricing of 7.25% to 7.75%.

In terms of multiples, at the middle of these guide ranges, the Class A tranche would provide 1.62 times the expected loss at the base case, or 1.47 times at the sensitivity case. That’s a low multiple and it will be interesting to see where pricing goes, as it will provide a good indicator of investor risk appetite for higher-yielding cat bond notes.

Class B would offer a base case multiple of 2.08 times the expected loss, or 1.92 times the sensitivity case. Class C would offer a base multiple of 2.54 times the expected loss, or 2.43 times the sensitivity EL.

Update 1:

In a clear demonstration of investor appetite for higher-yielding catastrophe bond notes, the price guidance for all three tranches has been adjusted, with each now offered to investors with narrowed guidance below the low-end of the initial launch range.

The riskiest Class A tranche launched with price guidance of 13.75% to 14.25%, but this has been narrowed and lowered to 13.5% to 13.75%, we understand.

The middle risk Class B tranche launched offering investors a coupon in the range of 9.25% to 9.75%, but this has dropped to 9% to 9.25%.

Finally, the lowest risk tranche of Class C notes, which were marketed with pricing of 7.25% to 7.75%, have had their pricing guidance adjusted downwards as well to 7% to 7.25%.

Update 2:

The pricing for the Galileo Re 2016-1 catastrophe bond settled at the low-end of the reduced guidance range.

The $100m Class A notes priced at 13.5%, the bottom of the reduced range and so offer investors a multiple of 1.56 times the base case EL, or 1.42 times the sensitivity case.

The $100m Class B tranche of notes again priced at the low-end of reduced guidance at 9%. That results in a multiple of 1.97 times the base EL, or 1.81 times the sensitivity case.

The lowest risk $100m Class C tranche of notes priced at the low-end again, at 7%. This tranche offer investors a multiple of 2.46 times the base EL, or 2.27 times the sensitivity case.