In a clear demonstration of investor appetite for higher-yielding catastrophe bond notes, the price guidance on all three tranches of the $300m Galileo Re Ltd. (Series 2016-1) international multi-peril cat bond issuance from XL has dropped to below the lower-end of the initial range.
The Galileo Re 2016-1 cat bond launched over a week ago and sees insurance and reinsurance group XL taking on the Bermuda domiciled issuance SPI used by Catlin, as it seeks to continue the long-standing relationship with the capital markets.
The cat bond is sponsored by XL Insurance (Bermuda) Ltd., although covers a range of XL Catlin subsidiaries, and seeks reinsurance and retrocession for losses from U.S. named storms, U.S. earthquake, Canada earthquake, European windstorm.
This 2016-1 issuance from Galileo Re covers three layers of the XL reinsurance and retro program with the protection for each of the covered perils on an annual aggregate and industry loss trigger basis. The transaction will run for three annual risk periods to the end of 2018.
The deal launched split into three $100m tranches and our sources tell us that at this time the cat bond has not upsized. However the price guidance for each tranche has been adjusted, with all three now being offered to investors with narrowed guidance below the low-end of the initial launch range.
The riskiest Class A tranche launched with price guidance of 13.75% to 14.25%, but this has been narrowed and lowered to 13.5% to 13.75%, we understand.
The middle risk Class B tranche launched offering investors a coupon in the range of 9.25% to 9.75%, but this has dropped to 9% to 9.25%.
Finally, the lowest risk tranche of Class C notes, which were marketed with pricing of 7.25% to 7.75%, have had their pricing guidance adjusted downwards as well to 7% to 7.25%.
Investor demand for this cat bond has no doubt been strong, given even the lowest risk tranche offers a coupon of over 7%. With the average coupon across all of 2015’s cat bond issuance just 5.01%, gaining access to these higher-yielding investment opportunities is increasingly important to cat bond and ILS fund managers with return targets to hit.
It certainly seems that investors will be willing to accept lower multiples in order to add these higher-yielding cat bond notes to their portfolios. Even at the top end of the new guidance the Class A tranche would only pay a multiple of 1.59 times the 8.66% expected loss base case. The multiple rises as the risk level, and coupon offered, comes down on the other tranches, clearly demonstrating investors willingness to assume more risk for higher return.
At these reduced price guidance ranges it is possible that the tranches simply price at the upper end of the new range, which would be the bottom of launch guidance. However with many lower risk cat bonds towards the end of 2015 having priced nearer to the top-end of guidance this is clear evidence of the opportunity for insurers and reinsurers to cede higher risk layers of their programs into the capital markets through catastrophe bonds.
We’ll keep you updated as the $300 million Galileo Re Ltd. (Series 2016-1) catastrophe bond from XL Group comes to market. You can read all about this deal and every other catastrophe bond in the Artemis Deal Directory.
Artemis’ Q4 2015 Catastrophe Bond & ILS Market Report – Outright market growth continues
We’ve now published our Q4 2015 catastrophe bond & ILS market report.
This report reviews the catastrophe bond and insurance-linked securities (ILS) market at the end of the fourth-quarter of 2015, looking at the $1.525 billion of new risk capital issued and the composition of the cat bond & ILS transactions completed during Q4 2015. The report also includes a review of the full year 2015 issuance and commentary from co-editor GC Securities.