AIG back with $200m Compass Re II U.S. wind parametric cat bond

Global insurance firm American International Group (AIG) is back in the catastrophe bond market with a Compass Re II Ltd. (Series 2015-1) deal, seeking U.S. wind reinsurance protection on a parametric trigger basis over a six month term.

Market sources told us this morning that AIG is back using ILS as a source of reinsurance capacity with a new Bermuda domiciled vehicle, Compass Re II Ltd., taking it back to an older naming convention and away from the more recent Tradewynd series of cat bonds.

There are a number of very interesting facts about this Series 2015-1 issuance from Compass Re II Ltd. As ever AIG appears to be testing the ILS market’s appetite for something different, in fact positively unique in recent times.

We have not seen a catastrophe bond covering U.S. wind or hurricane risks that uses a parametric trigger since April 2009 and Swiss Re’s Successor II Ltd. (Series 4) transaction. That’s six long years since a sponsor has elected to use a parametric trigger to gain reinsurance protection against these risks, so it’s refreshing to see one come to market.

That is the first factor in this cat bond that makes Compass Re II 2015-1 a particularly interesting deal.

The next is the term, or duration of the coverage. We understand that AIG is seeking just six months of reinsurance protection with this cat bond, to run from the official start of the Atlantic hurricane season on June 1st, to the end of the season on November 30th.

Using a parametric trigger for a single wind season of coverage makes a lot of sense, as it will provide AIG with a source of risk capital that would respond rapidly to any major hurricanes striking the coast this year.

So, onto the main deal details that we have received from our sources so far.

Compass Re II Ltd. will seek to issue a single $200m tranche of Series 2015-1 Class 1 notes, with the goal of providing a source of reinsurance protection to AIG and its affiliate companies.

The cat bond will cover U.S. wind risks along the Gulf and East coasts, from Texas right through to Massachusetts, we’re told. Coverage is on a per-occurrence basis and using a parametric index trigger, which will be constructed using actual event parameters reported by the National Hurricane Center.

The parametric trigger uses pre-defined points around the U.S. Gulf and East coastline and takes into account the location, maximum sustained winds and size (in terms of radius), of any qualifying storm or hurricane.

The coverage is for tropical and extra-tropical storms, as well as hurricanes, depressions and post-tropical cyclones, we’re told. Covering all bases with a broad but seemingly well-defined event definition, ensuring that the deal would be in-force for a repeat of superstorm Sandy as well.

Protection will kick in at a parametric index value, calculated based on the event parameters, from an index level of 100 up to exhaustion at an index level of 150.

We don’t have any details on the probabilities of attachment and expected loss for this deal. We understand that multiple risk modelling companies have assessed the transaction and will provide information to investors who are their subscribers.

We’re also told that AIR Worldwide has modelled the cat bond for rating purposes, but as yet the Fitch Ratings report is not available. Once that becomes available we may have more details.

Another interesting point about this catastrophe bond is that it has been structured as a zero coupon bond, so investors will receive premium at the end of the transactions term instead of coupon payments. As a result, the sponsor AIG will put the premium into the collateral trust at the start of the deals term, alongside the investors collateral.

Also noteworthy about this interesting transaction is the fact that this is the first cat bond to be structured by Rewire Holdings LLC, a firm that launched in September 2014 aiming to increase efficiency in the syndication of catastrophe risk to reinsurance and capital markets.

The Compass Re II 2015-1 cat bond is the first to be marketed using Rewire Holdings recently launched web-based marketplace, Rewireconnect, where investors can buy, sell or trade in ILS and catastrophe risk assets.

Using the platform will add efficiency to the cat bond transaction process for sponsor AIG and alongside issuing it as a zero coupon bond, which can be considered more cost-effective to issue, should make this deal compelling for them from a cost perspective.

Rewire is acting as sole structuring agent for the deal and SDDCO Brokerage Advisors, LLC is placement agent (or bookrunner).

We will update you as the Compass Re II Ltd. (Series 2015-1) catastrophe bond progresses to market and as new information becomes available. You can read all about the transaction and every other cat bond in the Artemis Catastrophe Bond Deal Directory.