Atmos Re cat bond for UnipolSai halved in size at higher pricing

It looks like the Atmos Re DAC catastrophe bond transaction will now get issued for sponsoring Italian primary insurer UnipolSai Assicurazioni S.p.A., but at half the initial size and at higher pricing, as the riskier layer was pulled from the ILS market due to lack of appetite.

The Atmos Re catastrophe bond was originally launched back in November 2018 and saw sponsor UnipolSai seeking a €90 million source of collateralised reinsurance across two tranches of notes that would be issued.

The response from ILS investors was not as positive as hoped for and the transaction soon disappeared off the radar as the issuing teams sought a solution that would be palatable for investors.

It now seems that the solution has been found and that is halving the size of the transaction and only issuing the more remote risk tranche of notes as a catastrophe bond. We’re told the riskier layer is being placed as a traditional reinsurance arrangement, albeit perhaps with some collateralised backing.

The Atmos Re cat bond will provide broad coverage for so-called “atmospheric phenomena,” snow pressure and flood risks.

Atmospheric phenomena includes multiple severe weather related risks, including wind storms, hail storms, thunder storms, tornadoes, snow storms, blizzards and any linked perils, so presumably also rainfall and related flooding.

Snow pressure is the risk of build up and weight of snow or ice causing roof collapse and similar impacts to structures, while the flood coverage is both river, coastal and precipitation related.

Hence Atmos Re includes multiple severe weather related perils within a single catastrophe bond coverage, providing almost an all-natural perils cover for Italy to the sponsor UnipolSai.

Coverage from the Atmos Re cat bond is for losses from these perils for events that occur across Italy, with protection on an annual aggregate and indemnity trigger basis.

At launch the Atmos Re cat bond proposed coverage for two layers and would issue two tranches of notes to support that. Now, only the less risky of the two remains.

So Atmos Re DAC will issue a €45 million tranche of Class A notes, to cover a layer of risk with an attachment probability of 1.31%, an initial expected loss of 0.45% and attaching at €145 million of losses to UnipolSai’s covered business.

The second tranche had been riskier with an expected loss of 5.58% and attaching at €100 million of losses to UnipolSai’s covered business. This tranche has been pulled and transacted as reinsurance we understand.

The €45 million Class A tranche notes had originally been offered to investors with price guidance set in a range from 3.5% to 4.5%.

Now, sources told us the pricing guidance has risen significantly, with the notes offered to investors with a coupon in a range from 4.25% to 4.75%.

We have been told that investors were uncertain of the broad range of perils covered, the use of the term atmospheric phenomena to describe them (as it seems a catch-all) and also the fact the risk modelling was completed by a division of the lead structurer and bookrunner Willis Towers Watson.

It is unusual for a transaction to be modelled by an entity that it not a third-party firm, but it is encouraging that investors and the broker have found a common-ground and a way to get at least some of this cat bond transaction issued.

In fact the Atmos Re transaction is encouraging for a number of reasons.

It shows a continued attempt to push the envelope of the catastrophe bond market and the coverage it can offer, but also highlights that investors will provide feedback and walk away if it is deemed a push too far.

It also shows that investors and deal structuring and bookrunning entities can together find a way to bring a more unusual risk to market successfully, which bodes well for continued market expansion in years to come.

It is only by trying out new structures, coverages, perils and terms that the ILS market can find what is palatable to its investors. The Atmos Re case is a prime example of this, perhaps trying too much at first but then finding a solution that allows for the sponsor to still benefit from capital markets backed reinsurance coverage, while the investors feel compensated for the risks they take on.

We understand that the now €45 million Atmos Re DAC catastrophe bond will be priced in the coming days and issued next week. You can read all about this and every other cat bond transaction in the Artemis Deal Directory.