Blue Danube Ltd. (Series 2012-1)

Blue Danube Ltd. is a Bermuda domiciled SPV established to support a variable rate note program for issuing catastrophe bonds on behalf of sponsoring German insurer Allianz.

Blue Danube Ltd. Series 2012-1 is the first issuance under this program and is seeking to issue a $200m cat bond in two Series 2012-1 tranches of $100m of notes. The deal upsized before close with each tranche growing to $120m and the deal becoming $240m in size.

The transaction is designed to provide Allianz with a source of fully collateralized cover for certain U.S. hurricane, U.S. earthquake, Canada earthquakes, Caribbean hurricane and Mexican hurricane risks. Cover will use a modelled/modified industry loss trigger which will weight the cover to Allianz’s own portfolio of risk.

The modelled/modified industry loss trigger will weight any event industry losses against Allianz’s market share in the covered area, thus providing a trigger mechanism that is better matched to Allianz’s actual covered business. Cover from Blue Danube is for both personal and commercial (including industrial) lines of business.

Swiss Re said in a press release that they developed the trigger for this cat bond, using a modelled industry trigger transaction (MITT) which takes industry loss estimates for the U.S. and Canada and weights them after the event against certain applicable modelled portfolios.

The Class A notes provide cover above an index value attachment point of 200, up to an exhaustion point of 225. The Class B notes have an attachment point of 112.5 and an exhaustion point of 162.5.

GC Securities highlighted the addition of other hurricane regions as ‘clash’ coverage. We think that what they mean here is that it’s unlikely that a hurricane hitting the Caribbean, Mexico or Central America will trigger the cat bond alone. Rather they will contribute to the index value of a storm which goes on to strike the U.S. mainland (or in reverse hits the U.S. first). This is a pretty clever way to extend the coverage provided if it is the case. This would also fit very well with the innovative trigger approach of using a modeled industry trigger transaction (MITT) structure that weights PCS losses in the covered area by modeled losses to Allianz’s notional exposure portfolio.

PCS will provide event data to AIR who will then establish whether a covered event has occurred under the terms of the transaction. AIR will also calculate the market share factors after the event using modelled loss techniques and using that and the event data calculate an index value for each event. There are three annual risk periods after each of which various factors can be reset.

Allianz Argos 14 GmbH is the counterparty to the risk transfer contracts in this transaction, Allianz SE acts as guarantor for its obligations under the risk transfer contracts.

The collateral from the sale of the notes will be invested in International Bank for Reconstruction and Development (IBRD) putable notes.

The Blue Danube transaction will run for a three-year period from April 3rd 2012 to April 2nd 2015.

Horseshoe Group are acting as administrator for the Blue Danube Ltd. SPV in Bermuda.

The Class A notes priced towards the lower end of expectations at 6% while the Class B notes priced slightly above the original expected range at 10.75%.