One of the world’s largest insurance companies is returning to the catastrophe bond market for the first time since 2013, as a $150m Blue Halo Re Ltd. (Series 2016-1) cat bond is launched to benefit sponsoring Allianz Risk Transfer, a unit of the Allianz global insurance group.
The last time we saw Allianz in the catastrophe bond market was in May 2013 when the insurer sponsored Blue Danube II Ltd. (Series 2013-1) for a $175m source of fully collateralised, capital market backed reinsurance coverage for multiple perils.
For its latest cat bond, Allianz’s ART unit (which specialises in alternative risk transfer, tailored and non-traditional insurance or reinsurance) is listed as the sponsor we understand, and the focus is on U.S. peak perils, with the insurer seeking a source of U.S. named storm and U.S. earthquake reinsurance protection from ILS investors.
Of course Allianz Risk Transfer also works closely with insurance-linked investment managers, including Nephila Capital, as a fronting insurer on certain transactions so it is possible that some of the risks it retains from ILS related activities are being transferred with this Blue Halo Re 2016-1 cat bond deal.
Blue Halo Re Ltd., a Bermuda domiciled special purpose insurer (SPI) will issue two tranches of ILS notes that will be offered and sold to investors in order to collateralised underlying reinsurance agreements between Blue Halo Re and Allianz Risk Transfer.
Reinsurance coverage from both tranches of notes will be for U.S. named storms (so tropical storms, hurricanes and any storm that has been named by the NHC) across all U.S. storm exposed states, including Florida, the Gulf Coast and east coast, as well as U.S. earthquake risks in all states.
Both tranches will feature an industry loss trigger, with PCS the reporting agency for both perils, with the reinsurance coverage being on an aggregate basis across the term with resets possible on an annual basis. The transaction will have a three-year term, providing Allianz ART with coverage to June 2019.
Blue Halo Re will issue a Series 2016-1 Class A tranche of notes, which is currently sized at $100m, and is the least risky tranche of this deal. The Class A notes will, we understand, attach at an industry loss index value of 1.3bn, covering up to 1.7bn with a franchise deductible of 25m. The Class A attachment probability is 8.65% and expected loss 7.24% at the base case or 8.56% WSST.
The Class B tranche of notes to be issued by Blue Halo Re, sized at $50m, are more risky, attaching at an index level of 750m and exhausting at 1.3m, again with a 25m deductible. These notes have an attachment probability of 15.14%, and an expected loss of 11.53% base and 13.19% WSST.
We’re told that the Class A notes are being offered to investors with coupon price guidance of 13% to 14%, which implies a multiple of 1.9 times the base case expected loss or 1.6 times the WSST EL, at the mid-point of spread guidance.
Meanwhile the Class B notes are being offered with coupon guidance of 18% to 20%, we understand, which would result in a multiple of 1.6 times the base EL, or 1.4 times the WSST EL, again at the middle of price guidance.
Being a higher risk and higher return cat bond the multiples are, as would be expected lower, and investor demand for notes paying a coupon of this level should be high. ILS investors are keen to add any high coupon opportunities to their portfolios, as they seek to enhance returns in a market that has in recent years seen declining coupons.
So for Allianz Risk Transfer this Blue Halo Re catastrophe bond is an opportunity to source reinsurance protection for peak risks that could impact its portfolio from the capital markets at attractive pricing, with demand for higher yielding cat bonds likely to help the insurer secure coverage at an attractive price.
We understand that Aon Securities is acting as sole structuring agent and book runner for this Blue Halo Re cat bond issuance, while AIR Worldwide is risk modelling and calculation agent.
Allianz Risk Transfer is targeting a June issuance for this Blue Halo Re Ltd. (Series 2016-1), we understand. We will update you as the transaction comes to market and you can read all about this and every other cat bond transaction in the Artemis Deal Directory.