Allianz has decided to redeem it’s Blue Wings Ltd catastrophe bond which covered it against floods in the UK. The deal which was completed only in April 2007 provided Allianz with $150m worth of protection against flood risks in the United Kingdom. The deal should have run until 2012. Blue Wings also provided some cover for earthquakes in Canada and the U.S.
Allianz state that they can obtain the cover more cheaply without turning to the capital markets now and as such want to recall the bond. They say that original estimates for the risk were very high and are now very low, which appears strange to observers as the original risk was modelled by Risk Management Solutions (RMS) usings risk models that were thought reliable. Flood risk in the UK hasn’t changed in the last year so we can see no reason for that causing this change of heart unless either the original estimate was incorrect or the changing marketplace calls for this redemption. To redeem the bond from investors Allianz are offering investors a repayment penalty of 1% of the outstanding principal along with interest due.
All the press about this sudden about turn refer to the flood risks and mention the emergence of a new flood model from Risk Management Solutions although they don’t state whether the emergence of that model has identified that a catastrophe bond was uncalled for in this particular situation.
Was the original model not accurate enough? Or perhaps due to the changes in the marketplace of the last year Allianz now find that risks of this size are easier placed in more traditional markets? Whatever the reasons we hope that Allianz aren’t pulling back from cat bonds completely and we’ll be watching the Blue Coast deal closely to see if any change of heart occurs there.
We’d only mentioned Blue Wings the other week as it’s ratings had been affirmed following a reset by RMS. Perhaps the reset provided the detail Allianz needed to understand that this particular deal was unnecessary?
Market participants, please comment and let us know what you think!