Blue Halo Re Ltd. (Series 2020-1)

This is the first Blue Halo Re Ltd. catastrophe bond to come to market in almost four years.

As with previous Blue Halo Re cat bond transactions, Allianz Risk Transfer is the ceding reinsurer through its Bermuda operation, but we understand the risks are supportive of the re/insurers work with the largest ILS fund manager Nephila Capital.

It’s believed that the rationale is to cover risks that are assumed and retained through the fronting work Allianz undertakes with ILS fund manager Nephila Capital and any others it is working with. In this way, the protection cascades through to protect some of the Nephila Capital portfolio, with some if not all of the risks notionally covered by the cat bonds related to the fronting arrangements between Allianz Risk Transfer and the ILS fund manager.

Blue Halo Re Ltd. will seek to issue two tranches of Series 2020-1 notes totalling $100 million as of launch, our sources said. Both will be sold to ILS investors and the resulting capital be used to collateralise two retrocessional reinsurance agreements between the issuer and Allianz Risk Transfer (Bermuda), which is the ceding reinsurer.

Both tranches of notes will be exposed to U.S. named storm events across all hurricane exposed states and territories, with one tranche covering a three-year term and the other one-year, but both on an industry loss trigger basis.

One tranche will provide Allianz Risk Transfer with annual aggregate retro reinsurance, while the other will provide second event per-occurrence protection but featuring an aggregate deductible, we’re told.

The first tranche of notes to be issued by Blue Halo Re Ltd. is a currently $75 million Series 2020-1 Class A tranche, that will provide annual aggregate protection across three year’s. The notes feature a franchise deductible and have an initial expected loss of 4.41% at the base case. They are being offered to cat bond investors with price guidance in a range from 12.5% to 13.5%, we understand.

The second tranche, is a currently $25 million Series 2020-1 Class B layer, that will provide second event per-occurrence cover with an annual aggregate deductible, but only covering a single year. The one year expected loss for these notes is 5.5% at the base case and they are offered to cat bond investors with coupon price guidance in a range from 14.5% to 16%.

The coupons on offer and expected losses show that this is the riskiest catastrophe bond to come to market so far in 2020, so it will be intriguing to watch the response of cat bond funds and ILS investors to the tranches.

Interestingly, both feature relatively high multiples of expected loss for cat bond tranches with double-digit returns on offer.

Often, double-digit returns mean multiples of 1.8 times EL to 2.2 times EL.

But in both of these cases, the mid-point of guidance would offer a multiple at market of around 3 times the expected loss at the base case.

So it does seem that the price guidance on offer here is reflective of reinsurance market conditions, which are of course firming considerably at this time. For comparison, the Blue Halo Re 2016-2 cat bond had a multiple at market of just over 2.07 times the base EL, while the 2016-1 deal multiples were well below 2X.

Update 1:

The target for the new Blue Halo Re 2020-1 catastrophe bond transaction from Allianz Risk Transfer has been lifted by 50% to $150 million, while the pricing has moved towards the upper-end of guidance.

The Series 2020-1 Class A tranche began offering $75 million of notes, but we’re told this has now been lifted to between $100 million and $125 million.

The Class A tranche will provide annual aggregate protection across a three-year term, with an initial expected loss of 4.41% at the base case. They were offered to cat bond investors with price guidance in a range from 12.5% to 13.5%, but we’re told this has now been lifted to 13.25% to 13.5%, towards the top-end.

The Series 2020-1 Class B layer tranche remains with a target of $25 million and will provide second event per-occurrence cover with an annual aggregate deductible across a single year term. The one year expected loss for these notes is 5.5% at the base case and they were first offered to cat bond investors with coupon price guidance in a range from 14.5% to 16%, but we’re told this has now lifted to the upper-end at 16%.

Update 2:

The target size for Allianz Risk Transfer’s (ART) new catastrophe bond has been lifted again, with the deal now aiming to secure up to $175 million of retrocession for the firm’s portfolio and some of the tail risks related to the ILS fronting it undertakes.

The Series 2020-1 Class A tranche is now seeking to secure $150 million of reinsurance protection for the sponsor.

The Class A tranche will provide annual aggregate protection across a three-year term, with an initial expected loss of 4.41% at the base case. These notes were offered to cat bond investors with price guidance in a range from 12.5% to 13.5%, which then lifted to 13.25% to 13.5%, towards the top-end, but we’re now told has been fixed at 13.25%.

The Series 2020-1 Class B layer tranche is still targeting $25 million of second event per-occurrence cover with an annual aggregate deductible across a single year term. The one year expected loss for these notes is 5.5% at the base case and they were first offered to cat bond investors with coupon price guidance in a range from 14.5% to 16%, and we’re now told this has been fixed at the upper-end at 16%.