Tailwind Re Ltd. (Series 2017-1)

Bermuda headquartered reinsurance firm Validus Holdings is to sponsor its first full catastrophe bond issuance with this Tailwind Re Ltd. Series 2017-1 transaction.

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.

Update 1:

The Tailwind Re catastrophe bond from Validus has been upsized by approximately 23% to $400 million during marketing, with all three tranches increasing in size and the price guidance dropping to below the initially marketed range for each as well.

The Class A tranche of Series 2017-1 notes from Tailwind Re were launched to investors as a $125 million offering, but this tranche has now grown to $150 million we understand. This tranche, with an initial expected loss of 3.41%, were offered to ILS investors with price guidance of 7.75% to 8.5%, but this has now fallen to 7.25% to 7.75%.

The Class B tranche of notes were also launched at $125 million, but have now been upsized to offer $150 million of notes to investors. A little riskier with an initial expected loss of 4.43%, these notes were marketed to cat bond investors with price guidance of 9.5% to 10.25%, but that has now dropped to 9% to 9.5%.

The final Class C tranche are the riskiest and launched as a $75 million offering, but this has now grown to a $100 million layer of risk. These notes have an initial expected loss of 5.64% and were offered to cat bond investors with coupon price guidance of 11.5% to 12.5%. Here the spread guidance has again dropped to below the initial range, falling to 11% to 11.5%, we’re told.

Update 2:

Pricing dropped again before the deal completed, with each of the tranches of notes set to pay a coupon at the bottom end of ther already reduced price guidance ranges.

The Class A tranche saw its coupon fixed at 7.25%, which is a drop in pricing of almost 11% from the original guidance mid-point. The Class B tranche priced with a 9% coupon, a drop in spread of roughly 9% from the initial mid-point. Finally, the Class C tranche priced at an 11% coupon, reflecting an 8% drop in spread during marketing from the initial mid-point.