Catlin Group has returned to the catastrophe bond market to seek at least $200m of reinsurance cover with the issue of Galileo Re Ltd. (Series 2015-1). Interesting the deal covers a significantly higher level of risk than the firms last cat bond.
Insurance and reinsurance firm Catlin, London-listed with a broad focus across property casualty and specialty risks, is no stranger to the catastrophe bond market having sponsored four transactions previously.
The firms previous cat bonds were the $300m Galileo Re Ltd. (Series 2013-1) issued in late 2013 and still in-force providing three years of protection from Jan 2014, the $150m Newton Re Ltd. (Series 2008-1), the $225m Newton Re Ltd. in 2007 and the £200m Bay Haven Ltd. in 2006.
With the new Galileo Re 2015-1, Catlins second issuance using its Galileo Re Ltd. Bermuda domiciled special purpose insurance vehicle and fifth cat bond in total, the re/insurer is seeking fully-collateralized protection for a much higher risk layer of its reinsurance program than before. In fact the deal is the highest risk layer seen in the cat bond market for some time.
In this issuance Galileo Re Ltd. is seeking to issue a single tranche of Series 2015-1 Class A notes, which will be sold to investors to provide a multi-year source of fully-collateralized reinsurance protection against certain U.S. named storm, U.S. and Canada earthquake and European windstorm risks (the same perils as the 2013 Galileo Re deal).
The notes will have a 3 year risk-period, maturing at December 31st 2017. All three of the covered perils will be covered on an annual aggregate basis and the triggers used are weighted industry loss index triggers, with PCS providing the index data for U.S. wind and quake and PERILS AG for European windstorm events.
U.S. named storm, so tropical storm, hurricane and post-tropical, coverage is for the typical U.S. east and gulf coast states and Florida, but also for some inland states where a degrading major storm could still have a major impact. U.S. quake is for the entire 50 states, BC and Canada. European windstorm cover is for the UK, Ireland, Germany, Belgium, France, Denmark, Luxembourg, Netherlands, Sweden, Norway and Switzerland.
We’re told that the weighted index attachment point for the Series 2015-1 Class A notes issued by Galileo Re will be $160m, while the exhaustion will be at an index value equivalent of $480m. That gap of $320m between attachment and exhaustion may hint at an ability to upsize this cat bond if Catlin chooses.
The notes have an initial attachment probability of 15.33%, showing just how high risk this transaction is. That number makes this the fourth highest attachment probability tranche of cat bond notes Artemis has recorded since the Deal Directory began back in the mid to late 1990’s.
The initial expected loss is 7.93%, which would be in the top ten highest EL figures Artemis has recorded, while the initial exhaustion probability is 3.94%.
So these notes are the riskiest tranche of a cat bond that Artemis has recorded since USAA’s Residential Reinsurance 2013 Ltd. (Series 2013-2) in December 2013.
So onto the price guidance. Artemis understands that the notes are being offered to investors with price guidance of 13.5% to 14%. Even at the top of that range the multiple would be less than 2 times the expected loss, which means this cat bond could see a final multiple well below the recent averages (which we document here by year).
So the question will be whether investors will support Catlin’s ambitions to secure this higher risk layer of cover at a lower multiple than has been seen for some time. Investors will likely welcome the opportunity to secure some higher-yielding cat bond notes, at a time when recent deals have been very low-yielding, we believe. So the ILS market will likely support Catlin’s ambitions.
Bringing this cat bond to market for Catlin is GC Securities, the capital markets and ILS arm of reinsurance broker Guy Carpenter, acting as sole structuring agent and bookrunner for the deal. AIR Worldwide is providing risk modelling and calculation agent services.
The fact that Catlin, through Galileo Re 2015-1, is seeking to issue such a high risk set of notes to ILS investors perhaps demonstrates a trend Artemis has expected to see, insurers and reinsurers taking advantage of the low-cost of ILS capital to lock-in cover with cat bonds.
Having seen a trend towards consolidation and retention of purchases by reinsurance buyers over the last two years or more, there are signs that some companies are set to buy more cover, or cover lower layers of their program, in order to take advantage of the low-pricing currently available in the market. Catlin perhaps sees an opportunity to secure this coverage now, at what might be the best pricing it may see for years if the market were to turn or a large loss were to occur.
With Catlin set to be acquired by XL Group later this year, if the deal goes through as it is expected to, the ultimate beneficiary of this catastrophe bond will be the combined group under the XL brand at some point. However we understand that the coverage will only be for the Catlin business and subsidiaries, so the acquisition should not impact the deal.
It will be interesting to see how this deal is received by ILS investors and whether the pricing moves up, down or stays at the middle of guidance. Where the price ends up offers another chance to see whether investors are reaching their limits in terms of risk and return appetite.