Arch targets first retro cat bond with $100m Claveau Re

Arch Capital Group, the Bermuda headquartered specialty insurance and reinsurance company, is in the capital market for its first ever property catastrophe bond, with an at least $100 million global peak peril focused Claveau Re Ltd. (Series 2021-1) retrocession issuance.

Arch Capital is no stranger to our extensive Deal Directory of catastrophe bonds and related insurance-linked securities (ILS), being listed 14 times as a direct sponsor of Bellemeade Re mortgage ILS transactions.

But it’s never been listed for a property catastrophe bond before, so this Claveau Re Ltd. transaction marks a first for the company.

Claveau Re Ltd. is a newly formed Bermuda based special purpose insurer (SPI), that will issue a single tranche of notes which will be sold to investors and the proceeds used to collateralize a retrocessional reinsurance agreement between the SPI and the ceding company.

In this case, we’re told that the ceding reinsurer is Arch Reinsurance Ltd., the global reinsurance entity of Arch Capital, as well as Arch Reinsurance’s Irish based DAC underwriting unit and its Lloyd’s managing agency on behalf of Syndicate 1955.

With this first Claveau Re cat bond, Arch is seeking a multi-year source of retrocessional reinsurance protection against losses from global peak peril events, on an industry loss trigger and annual aggregate basis, we understand.

The at least $100 million of notes to be issued will provide cover against losses from a wide range of perils, making this almost an all natural perils deal.

They include: US & Canada named storm and earthquake; US severe thunderstorm; US wildfire; US winter storm; US Caribbean quake; Japan typhoon and earthquake; Canada severe thunderstorm; Canada winter storm; European windstorm; Italy earthquake; Turkey earthquake; Australia earthquake; Australia tropical cyclone; New Zealand quake.

It’s a particularly wide range of perils and another transaction that will demonstrate the use of the catastrophe bond to access the capital markets, in an industry loss trigger form, as a way to secure global retrocessional protection against peak catastrophic perils.

Each of these perils has a deductible attached, meaning loss events have to cause an industry impact of a certain magnitude beifre they would qualify and begin eroding the cat bond principal.

The transaction is slated to provide four years of retro protection, running to the end of June 2025, we’re told. We also understand that there is a cap for coverage contribution from a US named storm.

Sources said the notes would attach once aggregate industry losses after the franchise deductibles reached $55 billion and exhaust at $77.5 billion.

The single, currently $100 million, tranche of Class A notes being issued by Claveau Re Ltd. will have an initial modeled expected loss of 7.18% and are being offered to cat bond investors with coupon price guidance in a range from 17% to 17.75% we’re told.

As we understand it, a single-shot US all natural perils industry loss warranty (ILW) with a trigger of $50 billion would be expected to price somewhere around the 18.5% to 20% range right now, which suggest this multi-peril, global and aggregate cover could actually be quite efficient in terms of pricing in the cat bond market.

It is encouraging to see Arch Capital entering the property catastrophe bond market and set to use it to secure global peak peril retro protection.

We have always expected to see more of these arrangements, but retrocession had been relatively well-priced traditionally and capacity had been ample up until a year or two ago. Now, the cat bond market is offering an increasingly well-priced and abundant alternative for major global reinsurers seeking wide-ranging, multi-year retrocessional protection.

We’ll update you as this first Claveau Re Ltd. (Series 2021-1) from Arch comes to market and you can read about this and every other catastrophe bond deal in our Artemis Deal Directory.