Allianz Risk Transfer (ART), the specialist and alternative risk focused unit of the Allianz global insurance and reinsurance group, is back in the catastrophe bond market seeking at least $100 million of annual aggregate and industry loss index based protection with a Blue Halo Re 2022 cat bond issuance.
With this 2022 issuance, Blue Halo Re Ltd. will issue two tranches of notes designed to provide Allianz Risk Transfer with a source of retrocessional reinsurance protection against losses from U.S. named storms and earthquakes.
It’s the first catastrophe bond that Allianz Risk Transfer has sponsored since June 2020, when a $175 million Blue Halo Re Ltd. (Series 2020-1) provided the company with multi-year US named storm protection.
That Blue Halo Re cat bond from 2020 matures in June this year. But in this case we suspect the 2022 issuance is more a case of looking to the catastrophe bond market for a competitively priced slice of aggregate retro protection, as in the current market cat bonds have been delivering this type of cover at a reasonable cost for issuers and with capacity much more readily available.
So Allianz ART is back looking for catastrophe bond investor support for its retrocessional reinsurance needs on an industry loss and aggregate basis. Once again, we assume the coverage is also set to protect some of the fronted risks that the carrier assumes from insurance-linked securities (ILS) funds, such as Nephila Capital.
In previous Blue Halo Re cat bond transactions, Allianz Risk Transfer acted as the ceding reinsurer through its Bermuda operation, but we understood from sources that the risk transfer was supportive of the re/insurers work with the largest ILS fund manager Nephila Capital.
The rationale behind these Blue Halo Re cat bonds has been to cover risks that are assumed and retained through the fronting work Allianz undertakes with ILS fund manager Nephila Capital and others it is working with, meaning some of the protection cascades through to protect areas of risk written for the Nephila Capital portfolio. Hence, it’s assumed, some if not all of the risks notionally covered by these cat bonds relate to the fronting arrangements between Allianz Risk Transfer and the ILS fund manager.
Given the cost of indemnity aggregate retro in the current hard and challenging market and the higher price of industry-loss warranty (ILW) coverage alongside that, the cat bond market offers buyers an abundant source of aggregate protection, at the right price, making a return to the cat bond market unsurprising at this point in the cycle.
Blue Halo Re Ltd. will seek to issue two tranches of Series 2022-1 notes, with a $100 million or greater target as of this issuances launch to investors, our sources said.
Both tranches of notes 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), the ceding reinsurer.
Both tranches of notes will be exposed to U.S. named storm and earthquake events, across all hurricane and quake exposed states and territories including Puerto Rico, over a three-year term and on an annual aggregate and industry loss index trigger basis.
Previously, the Blue Halo Re cat bonds have mixed aggregate and occurrence cover, in separate tranches. But this year, the aggregate focus is likely due to the higher costs in the traditional retro reinsurance marketplace.
A $50 million Series 2022-1 Class A tranche of notes feature a franchise deductible per-event and have an initial expected loss of 4.91% at the base case. This tranche of notes are being offered to cat bond investors with price guidance in a range from 10% to 11%, we’re told.
The $50 million Series 2022-1 Class B tranche of notes are a little riskier and also feature a franchise deductible per-event, with an initial expected loss of 7.02% at the base case. This tranche of notes are being offered to cat bond investors with price guidance in a range from 15.5% to 16.5%, we understand.
For US hurricane risk, Florida is the state that contributes the greatest percentage of expected losses, as you’d imagine, while California holds the most earthquake risk for these cat bond notes.
The multiples on offer are aligned with a 2016 catastrophe bond issuance from Blue Halo Re, which also covered both US wind and quake risks.
This new cat bond transaction is slated for issuance in February and being aggregate and offering a relatively high coupon, it will be interesting to see how strong the market’s appetite is for it, as this should set the tone for 2022 and the catastrophe bond market’s ability to supply much-needed aggregate retrocession.
This is the fourth Blue Halo Re catastrophe bond. Two were issued in 2016, a $185m Blue Halo Re Ltd. (Series 2016-1) and a $225m Blue Halo Re Ltd. (Series 2016-2), but one was hit by the 2017 hurricane season and faced some losses of its principal as a result. A third $175 million Blue Halo Re Ltd. (Series 2020-1) transaction was then issued in 2020.