Galileo Re Ltd. (Series 2019-1)

AXA XL has returned to the catastrophe bond market for its first international multi-peril transaction since late 2017, seeking to expand and replace certain of its capital markets sources of fully collateralized retrocessional reinsurance protection.

Our sources tell us that the sponsor is XL Bermuda Ltd., with the retrocessional reinsurance protection covering the AXA XL reinsurance related businesses across the Bermuda, London, Lloyd’s and international marketplaces.

Special purpose insurer Galileo Re Ltd. is said to be looking to issue five tranches of Series 2019-1 notes, only two of which currently have target sizes attached and these two alone amount to $400 million already.

However, the tranches will between them provide coverage across layers amounting to a huge $1.6 billion of limit, sources said, hence this Galileo Re 2019-1 cat bond looks to have the potential to grow significantly bigger if the market demand from cat bond funds and investors is there.

All of the tranches will provide AXA XL subsidiaries with a source of fully collateralised retro reinsurance on an annual aggregate and weighted industry loss trigger basis across a four-year term.

The covered perils are U.S., Puerto Rico and Virgin Islands named storm, U.S. earthquake, Canada earthquake, U.S. severe thunderstorm, European windstorm, Australian tropical cyclone, and Australian earthquake risks. Industry loss data providers PCS and PERILS will provide the reporting roles for the cat bond.

Given the potential scale of the transaction and the fact it’s structured across five layers, this Galileo Re 2019-2 cat bond transaction will offer a range of risk and return investment opportunities for cat bond investors.

An unsized Class A tranche of notes will provide protection across a $300 million layer attaching at $1.2 billion, giving a base initial expected loss of 7.74% and with the notes offered with price guidance in a range from 15.25% to 15.75%, we’re told.

An also unsized Class B tranche will cover a $300 million layer attaching at $1.5 billion, so having an initial expected loss of 4.98% and with the notes offered with price guidance in a range from 11.5% to 12%.

A Class C tranche is sized at $250 million, but covers a $300 million layer attaching at $1.8 billion, with an initial expected loss of 3.52% and with the notes offered with price guidance in a range from 9% to 9.5%.

A Class D tranche also has a size at $150 million, also covering a $300 million layer attaching at $2.1 billion, with an initial expected loss of 2.54% and offering price guidance in a range from 7.25% to 7.75%.

The final Class E tranche is unsized, but covers a larger $500 million layer, attaching at $2.4 billion, with an initial expected loss of 1.69% and offering price guidance in a range from 5.75% to 6.25%.

We understand that in order to qualify under the aggregate terms of the transaction events must exceed a $40 million franchise deductible in each case.

So in total, this cat bond’s protection will span layers from $1.2 billion up to a final exhaustion at $2.9 billion, which should the sponsor elect to upsize the deal significantly in response to investor demand means as much as a $1.7 billion layer limit could be available.

Update 1:

AXA XL pulled two of the tranches from this issuance, likely opting for other sources of retrocessional reinsurance. The remaining three tranches now target up to $575 million of protection for the company.

The remaining tranches of notes are the Class A tranche, which was launched without a size but is now targeting between $50 million and $75 million of  reinsurance protection for AXA XL companies across a $300 million layer that attaches at $1.2 billion of losses.

The Class A notes have a base initial expected loss of 7.74% and were initially offered with price guidance in a range from 15.25% to 15.75%, but this has now been fixed at the top-end, we understand, to pay a coupon of 15.75%.

The second remaining tranche is the Class C layer, that was launched at $250 million in size, but we’re told is now aiming for between this and $300 million of reinsurance protection for AXA XL. These notes cover a $300 million layer attaching at $1.8 billion of losses.

The Class C notes have an initial expected loss of 3.52% and their price guidance remains unchanged, staying in a range from 9% to 9.5%.

The final surviving tranche is Class D, which was launched at a size of $150 million and we’re told still aims to upsize to as much as $200 million. These notes cover a $300 million layer attaching at $2.1 billion.

This Class D tranche of notes have an initial expected loss of 2.54% and again the price guidance remains unchanged at this time, remaining in a range from 7.25% to 7.75%.

The Class B and Class E tranches, both of which were unsized at launch, have been pulled from the issuance.

Update 2:

AXA XL eventually settled for $475 million of fully collateralised, multi-year retrocessional reinsurance protection from its latest catastrophe bond.

The Class A tranche of notes, which are the riskiest, has now been fixed to provide $75 million of reinsurance protection to AXA XL companies across a $300 million layer that attaches at $1.2 billion of losses, with a base initial expected loss of 7.74% and will pay investors a coupon of 15.75%, which is the top-end of initial guidance.

The Class C layer has in the end secured $250 million of reinsurance protection for AXA XL, coming in at the lower-end of size expectations, to cover a $300 million layer attaching at $1.8 billion of losses. They have an initial expected loss of 3.52% and their pricing eventually settled at the mid-point of guidance at 9.25%.

The final tranche is Class D, the lowest risk layer, has now settled at a size of $150 million (again the lower end of size ambitions we understand) and will cover a $300 million layer attaching at $2.1 billion. With an initial expected loss of 2.54%, these notes have their pricing set at 7.45%, which is just slightly below the middle of initial guidance.