AXA XL, the global specialty insurance and reinsurance unit of the AXA Group, will settle its latest catastrophe bond Galileo Re Ltd. (Series 2019-1) at $475 million in size, as the company fixes pricing and allocations for its latest capital markets backed reinsurance transaction.
The transaction is significantly smaller than it could have been, had AXA XL elected to maximise on leveraging the catastrophe bond to cover the wide layer of its retrocessional reinsurance program that it occupies.
The Galileo Re 2019-1 cat bond could have grown to as large as $1.6 billion, as the initial offering features five tranches of notes spanning that much of the AXA XL program.
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 and so a significant upsizing seemed possible.
Spanning coverage across $1.6 billion of AXA XL’s retrocession and reinsurance program, the deal could have been much bigger than it has turned out to be. But the sponsor will have been comparing coverage from different sources and given the demand for higher yields from cat bond investors, as well as the reduced appetite for aggregate retro deals, the end-result is just $475 million in size.
Now, pricing has been assigned and allocations decided, with the transaction set to offer 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 Class A tranche of notes, which are the riskiest, has now been fixed to provide $75 million of reinsurance protection to AXA XL companies across a $300 million layer that attaches at $1.2 billion of losses, with a base initial expected loss of 7.74% and will pay investors a coupon of 15.75%, which is the top-end of initial guidance.
The Class C layer has in the end secured $250 million of reinsurance protection for AXA XL, coming in at the lower-end of size expectations, to cover a $300 million layer attaching at $1.8 billion of losses. They have an initial expected loss of 3.52% and their pricing eventually settled at the mid-point of guidance at 9.25%.
The final tranche is Class D, the lowest risk layer, has now settled at a size of $150 million (again the lower end of size ambitions we understand) and will cover a $300 million layer attaching at $2.1 billion. With an initial expected loss of 2.54%, these notes have their pricing set at 7.45%, which is just slightly below the middle of initial guidance.
So AXA XL has had to moderate its ambitions for this cat bond, with pricing reflecting the higher coupons being achieved by cat bond funds and investors in recent issuances, as they continue to demand higher yields in particular for these broadly exposed, aggregate retro cat bond deals.
But for AXA XL this is still a significant chunk of its retro reinsurance program and will play a key role alongside its other capital markets and traditional reinsurance arrangements.
This transaction has reflected the fact that, while investor appetite for new cat bond investments is particularly strong right now, investors and cat bond funds are more discerning and demanding a higher yield, particularly for aggregate risks which have threatened losses over recent years.
From the sponsors point of view, it is natural to secure protection from the most economically attractive sources, so it’s unsurprising to see AXA XL being selective about how much it relies on a single source of capital, given the current state of the global reinsurance and retro market.
We understand that this issuance will complete later this week.