Blue Halo Re Ltd. (Series 2016-1) – Full details:
Blue Halo Re Ltd., a Bermuda domiciled special purpose insurer (SPI) will issue two tranches of ILS notes that will be offered and sold to investors in order to collateralised underlying reinsurance agreements between Blue Halo Re and Allianz Risk Transfer.
Reinsurance coverage from both tranches of notes will be for U.S. named storms (so tropical storms, hurricanes and any storm that has been named by the NHC) across all U.S. storm exposed states, including Florida, the Gulf Coast and east coast, as well as U.S. earthquake risks in all states.
Both tranches will feature an industry loss trigger, with PCS the reporting agency for both perils, with the reinsurance coverage being on an aggregate basis across the term with resets possible on an annual basis. The transaction will have a three-year term, providing Allianz ART with coverage to June 2019.
Blue Halo Re will issue a Series 2016-1 Class A tranche of notes, which is currently sized at $100m, and is the least risky tranche of this deal. The Class A notes will, we understand, attach at an industry loss index value of 1.3bn, covering up to 1.7bn with a franchise deductible of 25m. The Class A attachment probability is 8.65% and expected loss 7.24% at the base case or 8.56% WSST.
The Class B tranche of notes to be issued by Blue Halo Re, sized at $50m, are more risky, attaching at an index level of 750m and exhausting at 1.3m, again with a 25m deductible. These notes have an attachment probability of 15.14%, and an expected loss of 11.53% base and 13.19% WSST.
We’re told that the Class A notes are being offered to investors with coupon price guidance of 13% to 14%, which implies a multiple of 1.9 times the base case expected loss or 1.6 times the WSST EL, at the mid-point of spread guidance.
Meanwhile the Class B notes are being offered with coupon guidance of 18% to 20%, we understand, which would result in a multiple of 1.6 times the base EL, or 1.4 times the WSST EL, again at the middle of price guidance.
During marketing, investor demand has helped Allianz ART to increase the size of the cat bond by 23%, so it now looks set to reach $185m in size. At the same time the price guidance on the two tranches of notes being issued has moved towards the upper-end of initial guidance.
The Blue Halo Re Series 2016-1 Class A notes began life as a $100m tranche, but that has now been increased to $130m, we understand. At the same time the price guidance, which at launch was 13% to 14%, has now been moved to the top-end at 14%.
Meanwhile, the Class B tranche of notes which are riskier, were launched at $50m in size and have now grown to $55m. This tranche was initially offered to investors with coupon guidance of 18% to 20%, but that guidance has now been fixed near the upper-end at 19.75%.
At the new price guidance the multiples paid to investors are more in-line with the recent issuance seen in the catastrophe bond market.
The $130m of Class A notes, with an expected loss of 7.24% at the base case or 8.56% WSST, would pay investors 1.9 times EL at the base case, or 1.6 times the WSST, at the revised price guidance. The $55m of Class B notes, with an expected loss of 11.53% base and 13.19% WSST, would pay investors 1.7 times EL at the base case, or 1.5 times the WSST, using the revised upwards coupon.
Update after 2017 hurricanes:
The $55 million of Class B notes are threatened by losses from hurricanes Harvey, Irma and Maria of 2017, with the notes priced down in the secondary market for as much as a 70% loss of principal.
Update December 2018:
We understand that the $55m of Class B notes have now begun to make some principal repayments to the sponsor, as losses have allowed it to make reinsurance recoveries under the terms of the notes.
Update June 2019:
The $130 million Class A tranche of notes have had their maturity extended by one month, which is likely to allow for the Class B notes to realise a recovery and mature, or for fresh loss estimates to emerge.
Update July 2019:
It’s become apparent that the Class A notes are now threatened by losses and have had their maturity extended by another month. This tranche remains priced at around 97 in the secondary market, so the threat to them does not seem severe at this time.
The Class B tranche, meanwhile, has now seen its $55 million of principal reduced by just over $40 million, as loss payments and reinsurance recoveries have continued for the sponsor.
The Class B tranche also now has its maturity extended, to allow for any further development and further reductions in the remaining almost $15 million of principal.