Galileo Re Ltd. (Series 2017-1)

XL Catlin companies and subsidiaries are back in the catastrophe bond market seeking a preliminary $150 million of capital markets backed reinsurance protection with a Galileo Re Ltd. (Series 2017-1) issuance.

This is the first catastrophe bond transaction to be issued in the wake of the major hurricane losses in the 2017 season and the pricing guidance for each tranche of notes seems to reflect the fact that ILS investors have faced losses, with pricing looking set to be at a higher multiple level than recent cat bonds before the catastrophe losses.

The Galileo Re 2017-1 cat bond features two tranches of notes, both of will provide XL Catlin subsidiaries with collateralised reinsurance protection for losses from U.S. named storms, U.S. earthquakes, Canadian earthquakes, U.S. severe thunderstorms, European windstorms, Australian tropical cyclones and Australian earthquakes.

U.S. severe thunderstorm coverage is an addition to recent catastrophe bonds sponsored from XL, which have tended to cover all the other perils but not tornado and severe convective weather risks.

This Galileo Re 2017-1 cat bond will provide its cover on a weighted industry loss and annual aggregate basis, with U.S triggers provided by PCS, while PERILS AG will provide industry loss trigger data for the European and Australian risks.

The ceding insurer is XL Bermuda Ltd. but this global multi-peril reinsurance protection covers XL Catlin insurers, reinsurers and Lloyd’s of London syndicates, so it is a broad coverage providing peak peril coverage on an aggregate basis across the re/insurance group (so retrocessional and reinsurance in nature).

A Galileo Re 2017-1 Class A tranche of notes has a preliminary size of $100 million, would attach at $360m and exhaust at $560m, with an initial attachment probability of 5.13%, expected loss of 3.37% and is being offered to cat bond investors with price guidance in a range from 7.5% to 8%, we understand.

A $50 million sized Class B tranche of notes would attach at $160m and exhaust at $360m, so sitting beneath the A notes, with an initial attachment probability of 17.53%, an expected loss of 9.72% and a much higher coupon, with price guidance in a range from 17% to 17.5%.

Both classes of notes will have a franchise deductible of $40 million and as each will cover a $200m layer of risk there is plenty of room for them to be upsized, should investor demand allow.

Update 1:

During marketing, the Class A tranche dropped in size to $75 million, we’re told, while their price guidance was fixed at the low end of guidance at 7.5%.

But the riskier Class B tranche increased in size, to $75 million, however their price guidance moved to the top of the marketed range at 17.5%.

It’s an interesting result, as it shows lower demand for the lower risk notes, although investors were prepared to accept a tightening of the spread on that Class A tranche.

For the higher risk note the demand has clearly been higher, although investors have also demanded a higher spread, pushing the coupon to the top of the previously marketed range.

This dynamic could reflect ILS investors desire to access higher returning business, in order to boost portfolio returns at a time when a significant portion of the outstanding cat bond market has been marked down.