The €45 million Atmos Re DAC catastrophe bond transaction, which was sponsored by Italian primary insurer UnipolSai Assicurazioni S.p.A.is facing a total loss, as secondary market cat bond pricing sheets have discounted the notes by around 100%.
The Atmos Re cat bond from UnipolSai came to market earlier this year and provides the insurer with reinsurance protection against losses from a broad range of European severe weather related and atmospheric perils, including flooding and snow pressure losses.
It provides the insurer with an annual aggregate source of protection against earnings volatility caused by weather related losses, as a result.
The transaction took some time to get to market, given the nature of the risks covered being in some cases largely unmodelled, with the deal having originally launched to investors in November 2018 and only finally settling a few months after in February 2019. Eventually it succeeded with pricing fixed at the top-end of guidance.
The protection that the Atmos Re cat bond affords its sponsor UnipolSai was hailed as “innovative earnings protection” and now we understand that this protection appears complete, as the cat bond has been impacted by successive severe weather related events in Italy and is now seen as likely to pay out in full, signalling another potential full loss for those invested in the deal.
We understand that severe weather events that hit UnipolSai in the third-quarter of this year ate into the carriers reinsurance position and eroded the cat bond by approximately half at the time.
Now, we understand that the insurers loss estimates have risen and the impacts to the reinsurance layer that the Atmos Re cat bond covers part of have increased, resulting in an expectation that the Atmos Re noteholders will face a total loss of their principal.
We’re not 100% sure at this stage whether any further severe weather or flood outbreaks have impacted the cat bond as well in Q4, or whether this worsening outlook for the Atmos Re notes is solely based on an increasing severity of the Q3 weather loss estimates.
Secondary cat bond brokers have marked the Atmos Re notes down as a total loss on pricing sheets in recent days, sources said, reflecting the expectation that the notes will pay out in full.