Allianz Risk Transfer, a specialist and alternative risk focused unit of the Allianz global insurance and reinsurance group, is back in the catastrophe bond market with a $100 million Blue Halo Re Ltd. (Series 2020-1) transaction, the first by the issuer in four years.
Two Blue Halo Re catastrophe bonds (a $185m Blue Halo Re Ltd. (Series 2016-1) and a $225m Blue Halo Re Ltd. (Series 2016-2)) were issued in 2016, but one was hit by the 2017 hurricane season and faced some losses of its principal as a result.
The coverage from the two previous Blue Halo Re cat bonds officially expired a year ago, but both of these bonds remain under extension through to the middle of 2022 at this time, allowing for any further loss development to be accounted for.
So it is encouraging to see Allianz Risk Transfer back in the market looking for catastrophe bond investors to support its needs for retrocessional reinsurance protection on an industry loss basis, with the coverage set to protect some of the ILS fronted risks that the carrier assumes from funds such as Nephila.
As with previous Blue Halo Re cat bond transactions, Allianz Risk Transfer is the ceding reinsurer through its Bermuda operation, but we understand the risks are supportive of the re/insurers work with the largest ILS fund manager Nephila Capital.
It’s believed that the rationale is to cover risks that are assumed and retained through the fronting work Allianz undertakes with ILS fund manager Nephila Capital and any others it is working with. In this way, the protection cascades through to protect some of the Nephila Capital portfolio, with some if not all of the risks notionally covered by the cat bonds related to the fronting arrangements between Allianz Risk Transfer and the ILS fund manager.
Blue Halo Re Ltd. will seek to issue two tranches of Series 2020-1 notes totalling $100 million as of launch, our sources said. Both will be sold to ILS investors and the resulting capital be used to collateralise two retrocessional reinsurance agreements between the issuer and Allianz Risk Transfer (Bermuda), which is the ceding reinsurer.
Both tranches of notes will be exposed to U.S. named storm events across all hurricane exposed states and territories over a three-year term and on an industry loss trigger basis.
One tranche will provide Allianz Risk Transfer with annual aggregate retro reinsurance, while the other will provide second event per-occurrence protection but featuring an aggregate deductible, we’re told.
The first tranche of notes to be issued by Blue Halo Re Ltd. is a currently $75 million Series 2020-1 Class A tranche, that will provide annual aggregate protection. The notes feature a franchise deductible and have an initial expected loss of 4.41% at the base case. They are being offered to cat bond investors with price guidance in a range from 12.5% to 13.5%, we understand.
The second tranche, is a currently $25 million Series 2020-1 Class B layer, that will provide second event per-occurrence cover with an annual aggregate deductible. The one year expected loss for these notes is 5.5% at the base case and they are offered to cat bond investors with coupon price guidance in a range from 14.5% to 16%.
The coupons on offer and expected losses show that this is the riskiest catastrophe bond to come to market so far in 2020, so it will be intriguing to watch the response of cat bond funds and ILS investors to the tranches.
Interestingly, both feature relatively high multiples of expected loss for cat bond tranches with double-digit returns on offer.
Often, double-digit returns mean multiples of 1.8 times EL to 2.2 times EL.
But in both of these cases, the mid-point of guidance would offer a multiple at market of around 3 times the expected loss at the base case.
So it does seem that the price guidance on offer here is reflective of reinsurance market conditions, which are of course firming considerably at this time. For comparison, the Blue Halo Re 2016-2 cat bond had a multiple at market of just over 2.07 times the base EL, while the 2016-1 deal multiples were well below 2X.
As a result of the higher risk and return associated with this new catastrophe bond from Allianz Risk Transfer it is going to be an interesting test case for ILS investor appetite.