Yet again a catastrophe bond has increased in size during marketing and the expected pricing on the transaction has dropped to, and below, the originally marketed range. This has been a trend in the cat bond market this year, with cat bonds regularly increasing in size and investors accepting lower coupon payments than a deal had been slated to launch with. Atlas Reinsurance VII Limited, the latest multi-peril cat bond from SCOR has more than doubled in total size.
Atlas Reinsurance VII see’s SCOR seeking a three-year source of fully-collateralized multi-peril retrocessional reinsurance for certain U.S. hurricane, U.S. earthquake and European windstorm risks. U.S. hurricane and U.S. earthquake cover is on an annual aggregate basis and uses a county weighted industry loss index from PCS. European windstorm cover is on a per-occurrence basis and will use a PERILS Cresta zone weighted industry loss index.
The deal is in two tranches and both are expected to increase in size, according to our sources. The Class A tranche which provides U.S. hurricane and earthquake protection was originally slated to be $50m but is expected to close between $50m to $60m. So only a slight increase in this tranche of notes.
The Class B tranche which provides the European windstorm protection was originally marketed in Euros as a €50m tranche, but that has more than doubled and is expected to close around €120m to €130m in size.
Overall this takes Atlas Reinsurance VII from a deal of approximately $115m in size to a deal which could close nearer to $228m (once the Euro tranche is converted) if both tranches achieve their maximum.
Pricing has dropped, another feature of recent cat bonds with all deals in the last few months achieving lower pricing, making the cover cheaper for the sponsor and signifying an increasing willingness among investors to take on cat bond risk for slightly lower returns. The Class A tranche was marketed with a coupon of between 8.25% and 9.00% but it is expected to price at or below the bottom of that range between 8.00% and 8.25%. The Class B tranche was marketed with a coupon between 3.65% to 4.15% and is now expected to price at the bottom end of that range at 3.65%.
As we wrote in our first article on this deal, SCOR have brought this Atlas VII cat bond to market a few months ahead of their usual issuance around the January renewals and this deal features a risk free period, not coming on-risk until the start of January. We suspect the reasoning behind this may have been to take advantage of current pricing in the cat bond market. If that was indeed the motivation, then SCOR have made a very shrewd move as they will have managed to secure an increased level of cover for a cheaper price by issuing their cat bond now.
The two tranches of notes have received preliminary ratings from Standard & Poor’s. The Class A notes have been rated ‘BB-‘ and the Class B notes have been rated ‘BB’.
We expect this Atlas Reinsurance VII Limited cat bond deal to complete next week with final pricing being decided today.