Tradewynd Re Ltd. (Series 2013-2) – Full details:
With Tradewynd Re 2013-2 AIG is seeking at least $100m of protection against a diverse portfolio of risks. The transaction is structured into four tranches of notes, two of which have a one-year term the other two providing cover for three-years. In this way AIG is seeking a mix of single and multi-year, fully-collateralized reinsurance protection. All four tranches provide indemnity protection on a per-occurrence basis, we understand.
According to sources the cover provided by Tradewynd Re 2013-2 will be for very similar types of business as the 2013-1 issuance. Due to the unmodelled nature of some of the risks, AIG is said to be providing additional information to enable investors to better model and assess the risks within the cat bond, as well as an analysis of exposure information. Data has also been provided to the three main risk modelling firms, RMS, AIR and EQECAT, to enable them to also analyse the risks and provide advice to clients.
The inclusion of unmodelled, or less well modelled, risks within a catastrophe bond demands a greater level of data provision. Investors need to be able to get comfortable with the risks they are taking on and the only way to do that is to have a clear picture of the risks and exposure bundled within the deal, enabling them to analyse and model the transaction more fully.
The transaction is targeting a size of at least $100m through the issuance of four tranches of notes. All four tranches will provide cover for named storms (so tropical, subtropical and hurricanes) in the U.S., Caribbean and Gulf of Mexico, as well as earthquake risks in the U.S. and Canada. All four tranches will use an indemnity trigger and provide per-occurrence protection.
A Class 1-A tranche of notes will provide one-year protection, from January to the end of December 2014. This tranche has an attachment probability of 1.3%, an expected loss of 1.16% and an exhaustion probability of 1.02%. They attach at $5 billion of losses and provide a percentage of cover up to an exhaustion point of $5.5 billion we’re told. These notes are being offered with a coupon guidance range of 6% to 6.75% we understand.
A Class 1-B tranche is also one-year in duration, covering AIG for 2014. These are a little riskier, with an attachment probability of 1.67%, an expected loss of 1.47% and an exhaustion probability of 1.3%. They attach at $4.5 billion of losses and cover up to an exhaustion point of $5 billion. According to sources these notes are being offered with a coupon guidance range of 6.75% to 7.5%.
A Class 3-A tranche provide three-year cover, from January 2014 to the end of December 2016. They cover the same layer of risk as the Class 1-A, attaching at $5 billion of losses to AIG and exhausting at $5.5 billion. The attachment probability is 1.3%, expected loss is 1.16% and exhaustion probability is 1.02%. These notes are being offered with a price guide range of 6.25% to 7%.
The final Class 3-B tranche is also a three-year cover, from Jan 2014 to end of Dec 2016. These cover the same layer of risk as the Class 1-B tranche, losses from at $4.5 billion up to $5 billion, so have an attachment probability of 1.67%, an expected loss of 1.47% and an exhaustion probability of 1.3%. The price guidance for these notes is 7% to 7.75%.
The two three-year tranches both feature a variable reset mechanism, we’re told, a popular feature allowing the sponsor to elect to increase the probability of attachment and expected loss, within defined bounds, as well as increasing the interest spread in line with the changes. We’re unsure what the boundaries are for the allowed changes but understand the notes could only become riskier, not less risky if a variable reset is elected by AIG.
We understand that the covered book of business is similar to Tradewynd Re 2013-1, so includes both personal lines consumer policies as well as commercial insurance lines of business.
The personal lines book includes lines such as residential coverage, high net worth personal lines, auto physical damage, yacht and fine art and collections and excess and surplus business. The commercial book covers diverse risks from commercial property, to energy risks, engineering risks, marine, aerospace and some of AIG’s program business. Similarly to Tradewynd 2013-1, this cat bond covers named storms in the Gulf of Mexico, plus energy risks, which suggests coverage for offshore energy platforms and associated covered assets.
Update 1: One of the four tranches of notes has been withdrawn from the issuance and the other three now have preliminary sizes which in total add up to $180m.
The riskier of the 1-year tranches of notes, Class 1-B, has been withdrawn from the offering.
The Class 1-A tranche, which provides 1-year protection, from January to the end of December 2014 has a preliminary size of $30m we understand. These notes launched with a coupon guidance range of 6% to 6.75% , but that range has now tightened to 6% to 6.25%.
The Class 3-A tranche, which provides 3-year cover, from January 2014 to the end of December 2016 has a preliminary size of $75m. These cover the same layer of risk as the Class 1-A notes. This tranche was launched with a price guide range of 6.25% to 7% which has now tightened to 6.25% to 6.5%.
Finally, the Class 3-B tranche, also a three-year cover, from Jan 2014 to end of Dec 2016, has a preliminary size of $75m. This tranche would have provided cover for the same layer as the withdrawn Class 1-B notes. The price guidance for these notes when the deal launched was 7% to 7.75%, but this tranche has also see pricing tighten to 7% to 7.25%.
Update 2: The Tradewynd Re 2013-2 cat bond has now grown in size again to offer $400m of notes from the remaining three tranches.
At the same time the pricing has been set to the top end of the narrowed range.
The tranches now look as follows:
The Class 1-A tranche has more than tripled from to $100m we understand. The price guidance was set at 6.25%.
The Class 3-A tranche has more than doubled to $160m in size. The price guidance has now been set at 6.5%.
Finally, the Class 3-B tranche has almost doubled to $140m. The price guidance has been set at 7.25%.
Update 3: Pricing moved again on this transaction, with two tranches dropping to the bottom of initial pricing guidance.
Class 1-A – still $100m in size and pricing unchanged at 6.25%.
Class 3-A – still $160m in size. But price guidance reduced to the lower end of the originally marketed range, at 6.25%.
Class 3-B – still $140m. Price guidance reduced down to the lower end of the original range at 7%.
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