AXA XL, the global specialty insurance and reinsurance unit of the AXA Group, is returning to the catastrophe bond market for the first time since 2017, with a new Galileo Re Ltd. (Series 2019-1) catastrophe bond transaction that seeks at least $400 million of protection, but could grow much larger.
In fact, this is the first catastrophe bond transaction sponsored by AXA XL since AXA acquired Bermudian specialist XL Catlin, which is encouraging for the market given the firm was a prolific sponsor using significant amounts of collateralised capacity for its reinsurance and retrocession.
As with previous Galileo Re cat bond deals, the transaction will be an industry loss trigger deal, but in this case the eventual size of the issuance is going to be the most interesting factor in it.
Given the potential for retro market rate firming around the renewals, numerous sources suggest we could see a number of larger players returning to the cat bond market, or visiting for the first-time, in the coming months, of which this is the first such deal.
Our sources tell us that the sponsor is XL Bermuda Ltd., with the retrocessional reinsurance protection covering the AXA XL reinsurance related businesses across the Bermuda, London, Lloyd’s and international marketplaces.
Special purpose insurer Galileo Re Ltd. is said to be looking to issue five tranches of Series 2019-1 notes, only two of which currently have target sizes attached and these two alone amount to $400 million already.
However, the tranches will between them provide coverage across layers amounting to a huge $1.6 billion of limit, sources said, hence this Galileo Re 2019-1 cat bond looks to have the potential to grow significantly bigger if the market demand from cat bond funds and investors is there.
All of the tranches will 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 covered perils are 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. Industry loss data providers PCS and PERILS will provide the reporting roles for the cat bond.
Given the potential scale of the transaction and the fact it’s structured across five layers, this Galileo Re 2019-1 cat bond transaction will offer a range of risk and return investment opportunities for cat bond investors.
An unsized Class A tranche of notes will provide protection across a $300 million layer attaching at $1.2 billion, giving a base initial expected loss of 7.74% and with the notes offered with price guidance in a range from 15.25% to 15.75%, we’re told.
An also unsized Class B tranche will cover a $300 million layer attaching at $1.5 billion, so having an initial expected loss of 4.98% and with the notes offered with price guidance in a range from 11.5% to 12%.
A Class C tranche is sized at $250 million, but covers a $300 million layer attaching at $1.8 billion, with an initial expected loss of 3.52% and with the notes offered with price guidance in a range from 9% to 9.5%.
A Class D tranche also has a size at $150 million, also covering a $300 million layer attaching at $2.1 billion, with an initial expected loss of 2.54% and offering price guidance in a range from 7.25% to 7.75%.
The final Class E tranche is unsized, but covers a larger $500 million layer, attaching at $2.4 billion, with an initial expected loss of 1.69% and offering price guidance in a range from 5.75% to 6.25%.
We understand that in order to qualify under the aggregate terms of the transaction events must exceed a $40 million franchise deductible in each case.
So in total, this cat bond’s protection will span layers from $1.2 billion up to a final exhaustion at $2.9 billion, which should the sponsor elect to upsize the deal significantly in response to investor demand means as much as a $1.7 billion layer limit could be available.
Of course, there’s no guarantees it upsizes at all, as it will come down to how the sponsor elects to mix its sources of reinsurance and retrocession, but getting out early with this may prove beneficial and provide an opportunity to stimulate investor interest in the transaction.
We understand the transaction targets a settlement in early December.
We’ve added this new Galileo Re Ltd. (Series 2019-1) transaction to our Deal Directory, where you can read about and analyse almnost every catastrophe bond. We’ll update you as information becomes available.