American International Group’s (AIG) latest catastrophe bond transaction Tradewynd Re Ltd. (Series 2013-1) has upsized by 25% from the $100m it began marketing at to now offer $125m of notes, we understand. At the same time the price guidance on the notes had been moved to the upper end of the originally marketed range, a rare occurrence for pricing to move upwards in recent cat bond deals.
Tradewynd Re Ltd., a Bermuda domiciled SPI is issuing a single tranche of Series 2013-1 Class 1 notes which will be used to collateralize a source of multi-year reinsurance protection for AIG companies. The protection from Tradewynd Re will be for named storms (so tropical storms and hurricanes) in the U.S., Caribbean and Gulf of Mexico and also earthquake risks for the U.S., District of Colombia and Canada over a five-year risk period.
The cat bond covers a particularly diverse book of business for AIG, including both personal lines consumer policies as well as commercial insurance. The personal lines book includes residential coverage across the U.S. and Caribbean as well as items such as high net worth residential, auto, yacht and fine art. The commercial book covers diverse risks from commercial property, to energy risks, engineering risks, marine and aerospace.
The transaction will use an indemnity trigger and protection is on a per-occurrence basis. The attachment point is at $4.5 billion of indemnity losses and the exhaustion point is at $5 billion of losses. The notes have an attachment probability of 1.6%, an expected loss of 1.43% and an exhaustion probability of 1.3%.
So the deal began marketing almost two weeks ago with a single tranche of notes of $100m being offered to investors. This tranche of notes has now increased in size by 25% to $125m.
The price guidance the deal began marketing with was a range of 7.25% to 8.25%. The deal is likely to price offering a coupon right at the top end of that range, at 8.25%.
Looking at the expected loss of 1.43% and the coupon of 8.25% it does seem that this transaction is pricing at a particularly high multiple (a multiple of approx 5.78), but that is likely explained by the unusual nature of the book of business covered by this cat bond and the fact it covers items such as Gulf of Mexico energy risks. These are not common risks in the cat bond market and investors have likely demanded a higher multiple in return for collateralizing this deal.
It’s actually quite encouraging to see that investors have demanded a high multiple for this transaction, as it is unusual, it does contain some less understood exposures from a modelling point of view and there must have been some uncertainty among ILS investors over participation in this deal.
Tradewynd Re is the first cat bond to be marketed under the AIG brand. The four other AIG company cat bonds were issued under National Union Fire Insurance Co. of Pittsburgh; Compass Re Ltd. (Series 2012-1) and Compass Re Ltd. (Series 2011-1), and under Chartis with Lodestone Re Ltd. (Series 2010-2) and Lodestone Re Ltd. (Series 2010-1).