Blue Danube II Ltd. (Series 2013-1)

Blue Danube II Ltd. is a newly formed Bermuda domiciled special purpose insurer which is being established as a shelf program to allow for future cat bond note issuances. This first Series 2013-1 issuance will see a single tranche of notes issued with a preliminary size of $150m.

Allianz is seeking a fully-collateralized source of multi-year reinsurance protection for certain hurricane and earthquake risks. This will replace and expand the cover it had from soon to mature Blue Fin 3 cat bond.

The actual counterparty for the deal is Allianz Argos 14 GmbH, a subsidiary of the Allianz group of companies. In this deal Blue Danube II Ltd. will issue a single tranche of notes to collateralize risk transfer contracts which will provide Allianz Argos 14 GmbH with a multi-year source of fully collateralized reinsurance protection on a per-occurrence basis.

The deal will provide reinsurance protection against hurricanes or named storms in the U.S., the majority of the Caribbean and Central America including Mexico. The deal will also provide protection against earthquake risks in the U.S. and all provinces of Canada. The deal term will be for three years with maturity expected in May 2016. Coverage is for both personal and commercial line losses.

U.S. hurricane coverage is for named storms in 31 states, which we understand to be; AL, AR, CT, DC, DE, FL, GA, HI, IL, IN, KY, LA, ME, MD, MA, MS, MO, NH, NJ, NY, NC, OH, OK, PA, RI, SC, TN, TX, VT, VA, WV.

Caribbean and Central American hurricane coverage is for named storms in; Anguilla, Antigua, Barbuda, Aruba, Bahamas, Barbados, Bermuda, The Cayman Islands, Costa Rica, Dominica, Dominican Republic, El Salvador, Grenada, Guadeloupe, Guatemala, Haiti, Honduras, Jamaica, Martinique, Mexico, Montserrat, Netherlands Antilles, Nicaragua, Panama, Puerto Rico, St. Maarten, Trinidad & Tobago, and the U.S. Virgin Islands.

U.S. earthquake coverage is for the 50 contiguous states and the District of Columbia. Canadian earthquake coverage is for all Canadian provinces.

The Blue Danube II cat bond uses two types of modelled industry loss triggers. The transaction uses the Modelled Industry Trigger Transaction (MITT), which takes industry loss estimates for the U.S. and weights them after the event against certain applicable modelled portfolios, and also a standard modelled loss trigger depending on the region.

The MITT trigger, developed by reinsurer Swiss Re and used in Allianz’s Blue Danube Ltd. cat bond last year, is for domestic U.S. hurricane and earthquake risks. The modelled loss trigger is being used for the other regions that this cat bond covers for hurricane risks, so most of the Caribbean and certain Central American countries including Mexico.

Property Claims Services (PCS) is providing industry loss estimate data for the transaction, we assume just for the U.S. hurricane and earthquake perils as PCS does not cover the Caribbean or Central America.

This data will be fed into the risk model to calculate index values using certain weighting factors for the MITT trigger perils and the calculation agent then determines whether an event has breached the modelled industry index trigger level.

For the Caribbean and Mexico a more typical modelled loss calculation will be undertaken to calculate the event loss amount, using the notional portfolio. National Hurricane Center and USGS data will be used for the two perils of hurricane and earthquake.

The cat bond notes will cover losses between an event index value of 148.3 and 182.9 on a per-occurrence basis in the first risk period.

According to historical loss modelling, the only event on record which would have caused the Class A notes to be triggered was the 1906 San Francisco earthquake.

The modelled attachment probability for the notes in the first year is 1.21%, the modelled expected loss is 0.96% and the modelled exhaustion probability is 0.73%.

The proceeds from the sale of the notes issued by Blue Danube II will be invested in IBRD floating-rate notes.

This deal launched with a price guidance range of 4.75% to 5.5%, we understand, but we’re now told that this has been reduced today down to a range of 4.25% to 4.75%, so it will price below the originally marketed range. We don’t know whether the deal has increased in size at this time, we’re told it is still being marketed as $150m of notes today.

Update: This cat bond grew slightly in size to $175m by the time it finally priced. The pricing settled at the lower end of the already reduced range at 4.25%.