Tradewynd Re Ltd. (Series 2014-1)

With Tradewynd Re Ltd. (Series 2014-1) AIG is seeking at least $300m of fully-collateralized reinsurance protection, through the issuance of three tranches of cat bond notes, Artemis understands. All three tranches of notes will provide AIG with reinsurance cover on an indemnity and per-occurrence basis, with two tranches providing their cover over a three-year risk period, while one has a one-year risk period.

The coverage is for similar perils as the previous Tradewynd Re cat bonds. Named storms (so tropical storms and hurricanes) are covered across the U.S., Canada, Mexico, most of the Caribbean, Gulf of Mexico and the District of Colombia. Earthquake risks are covered across the U.S., Canada, Mexico, most of the Caribbean and the District of Colombia.

Two of the Series 2014-1 tranches of notes being issued by Tradewynd Re are riskier than those issued in the previous deals, sitting below them in AIG’s reinsurance tower, we understand. The third tranche will sit alongside the other Tradewynd deals, but with a drop-down feature allowing the coverage to move down a layer should the cat bond tranches beneath be exhausted.

A Class 1-B tranche of notes will sit at the lower level, below the older Tradewynd cat bonds and are the tranche with a one-year risk period through 2015. This tranche, as yet unsized we understand, has an attachment probability of 3.35%, an exhaustion probability of 1.43% and an expected loss of 2.2%. These notes attach at $3 billion of qualifying losses to AIG up to $4.5 billion.

A Class 3-A tranche of notes, with a three-year risk period, sits at the same level of the older Tradewynd cat bonds. This tranche attaches at $4.5 billion of losses to AIG up to $5.5 billion, but has a drop-down feature allowing them to move down to a $3 billion attachment point. The probability of attachment is 1.43%, the exhaustion probability is 0.91% and the expected loss is 1.14%.

The final tranche, Class 3-B, sits at the same level as Class 1-B but beneath 3-A, making this the tranche that if eroded would see the 3-B tranche drop down to replace it, we understand. These notes attach at $3 billion of losses up to $4.5 billion, with an attachment probability of 3.35%, an exhaustion probability of 1.43% and an expected loss of 2.2%. These notes have a three-year risk period as well.

So, the one year tranche seems almost an extension of the cover provided by the Class 3-B notes for the first year, but with the Class 3-B notes being replaceable by the Class 3-A should they be eroded as well. This will give AIG more first-year cover across the lower level of its programme, at $3 billion of losses to the insurer, while the drop-down could then be activated should that all be exhausted.

As with its other Tradewynd Re catastrophe bonds, AIG is seeking cover for a diverse portfolio of underlying risks again with this deal. We understand that as with the previous Tradewynd’s this 2014-1 cat bond will cover both personal lines consumer insurance policies as well as commercial insurance lines of business.

The commercial book contains such covered business lines as commercial property, energy, marine and engineering risks. As with previous Tradewynd’s, note the clever inclusion of energy risks with coverage of the Gulf of Mexico for hurricanes. The personal coverage covers lines of business such as residential coverage, high net worth personal lines, auto physical damage, yacht and fine art and collections and excess and surplus business.

With its Tradewynd Re cat bonds AIG is sensibly covering large portions of its book, likely in areas that the firm is seeking growth as well, using capital markets protection as a capital tool as well as protection. ILS investors are by now familiar with these deals and the diverse range of risks included in them, so we expect to see broad support for AIG’s latest deal.

In terms of pricing, we understand that the one-year tranche of Class 1-B notes are being marketed with price guidance of 6.5% to 7.5%, the Class 3-A tranche which sit higher up and feature the drop-down have price guidance of 4.75% to 5.5% and the Class 3-B notes sitting beneath 3-A have guidance of 6.5% to 7.5%.

Update 1:

Tradewynd Re Ltd. (Series 2014-1) has increased in size while marketing by 67% to now offer $500m of notes to investors.

The Class 1-B tranche of notes remain at $100m, the Class 3-A tranche of notes with a three-year risk period also stay at $100m in size, but the other three-year tranche, the Class 3-B notes has been increased in size to $300m.

In terms of pricing, the Class 1-B notes launched with price guidance of 6.5% to 7.5%, but are now offered at 6.75% to 7%. The Class 3-A tranche, which sit higher up and feature the drop-down, launched with guidance of 4.75% to 5.5%, which has narrowed to 5% to 5.12%. Finally, the Class 3-B notes which has upsized to $300m and sit beneath 3-A, launched with guidance of 6.5% to 7.5%, but are now offered with tightened guidance of 6.75% to 7%.

Update 2:

Artemis understands that at final pricing on Friday, all the tranches were priced and two priced below the middle of guidance while the third priced at the mid-point.

The Class 1-B notes have now settled with pricing of 6.75%. The Class 3-A tranche has been set at pricing at 5%. Finally, the Class 3-B notes have been priced at 7%.

The Class 1-B tranche of notes has an expected loss of 2.2%, so with pricing set at 6.75% the multiple for these notes is 3.1 times. The Class 3-A tranche of notes has an expected loss of 1.14%, which with pricing set at 5% sees them with a multiple of 4.4 times the expected loss. Finally, the Class 3-B tranche has an expected loss of 2.2%, so with a coupon of 7% is a multiple of 3.2 times.