AXA XL, the global specialty insurance and reinsurance unit of the AXA Group, is hoping to upsize its latest catastrophe bond issuance, as the Galileo Re Ltd. (Series 2019-1) transaction is now aiming for up to $575 million of protection for the firm, but two tranches of the issuance have been pulled.
At launch in November the Galileo Re 2019-1 catastrophe bond was targeting at least $400 million of protection from a five tranche issuance, but with only two of the tranches having a suggested size to them at the time.
The five tranches together spanned a huge $1.6 billion of AXA XL’s retrocession and reinsurance program, which left the company with room to significantly increase the size of the cat bond if it chose to.
But it seems the company was testing the market with this issuance and now we understand that two of the five tranches will not be issued at all, while the other three between them are aiming for somewhere between $450 million and $575 million of coverage.
The three remaining Series 2019-1 tranches that Galileo Re Ltd. is set to issue will all provide AXA XL subsidiaries with a source of fully collateralised retro reinsurance on an annual aggregate and weighted industry loss trigger basis across a four-year term.
The notes will cover certain losses from a range of international perils, U.S., Puerto Rico and Virgin Islands named storm, U.S. earthquake, Canada earthquake, U.S. severe thunderstorm, European windstorm, Australian tropical cyclone, and Australian earthquake risks.
The remaining tranches of notes are the Class A tranche, which was launched without a size but is now targeting between $50 million and $75 million of reinsurance protection for AXA XL companies across a $300 million layer that attaches at $1.2 billion of losses.
The Class A notes have a base initial expected loss of 7.74% and were initially offered with price guidance in a range from 15.25% to 15.75%, but this has now been fixed at the top-end, we understand, to pay a coupon of 15.75%.
The second remaining tranche is the Class C layer, that was launched at $250 million in size, but we’re told is now aiming for between this and $300 million of reinsurance protection for AXA XL. These notes cover a $300 million layer attaching at $1.8 billion of losses.
The Class C notes have an initial expected loss of 3.52% and their price guidance remains unchanged, staying in a range from 9% to 9.5%.
The final surviving tranche is Class D, which was launched at a size of $150 million and we’re told still aims to upsize to as much as $200 million. These notes cover a $300 million layer attaching at $2.1 billion.
This Class D tranche of notes have an initial expected loss of 2.54% and again the price guidance remains unchanged at this time, remaining in a range from 7.25% to 7.75%.
The Class B and Class E tranches, both of which had been unsized at launch, have been pulled, we understand. It’s possible that AXA XL has found other sources of retrocessional reinsurance more attractively priced for these specific layers of its program, hence pulling them from issuance.
It’s likely that this is more a story of the sponsor seeking out the best possible execution for specific layers of its retro reinsurance program, than a lack of investor demand for the two layers of notes that were pulled.
Being an aggregate retro transaction it was always going to face investor demand for higher pricing, compared to previous cat bond deals AXA XL has sponsored. But it is encouraging that it looks set to complete at least a little larger than the originally mooted size and that at least for the first tranche the pricing is certainly at a higher benchmark than previous Galileo Re cat bond deals.
This transaction is a sign though, that while investor appetite for new cat bond investments is particularly strong right now, investors and cat bond funds are being discerning and demanding a certain level of return, particularly for aggregate risks which have threatened losses over recent years.
From the sponsors point of view, it makes sense to secure protection from the most economically attractive sources, so it’s not surprising to see AXA XL looking to achieve that and taking these two layers of its program elsewhere.
You can read all about AXA XL’s new Galileo Re Ltd. (Series 2019-1) transaction to our Deal Directory, where you can analyse details of almost every catastrophe bond. We’ll update you as information becomes available.