Covéa Group has now successfully priced its new Hexagon III Re Pte. Ltd. (Series 2021-1) catastrophe bond transaction, but has only managed to secure €153 million of its original €200 million target of capital market backed reinsurance from the deal.
The French mutual insurance society is still on the verge of closing its largest catastrophe bond to-date, but the market has not been as kind as the company would have liked, as investors fully supported one tranche of the deal, but required a relatively significant price increase for the higher-risk layer of notes.
Covéa returned to the catastrophe bond market earlier in November with a target to secure €200 million of reinsurance from the capital markets to cover losses from windstorms, hail storms and certain other natural peril events (such as snowfall, earthquake, frost, ice, flooding, volcanic risks, mudslides and avalanches) across mainland France, Monaco and Andorra, from a twin-tranche issuance and with the coverage on an indemnity trigger and per-occurrence basis, across a four-year term.
For the first time, the insurer has turned to Singapore for a cat bond, its previous cat bond issues having been domiciled in Ireland, as Covéa looks to benefit from the ILS grant program to reduce some of its issuance costs.
At launch, we noted that the multiples of this cat bond did appear to be very low and investors seem to have agreed on the higher-layer at least, with price guidance rising relatively significantly for that layer.
As we then explained in our update on the deal earlier this week, Covea’s target for the Hexagon III Re catastrophe bond was lowered, with the size mooted at between €150 million and €190 million of reinsurance protection.
At the same time price guidance diverged, with the lower-risk layer looking set to price at the bottom of guidance and the higher-risk layer seeing its pricing rise relatively significantly.
Now, with both tranches of notes priced, Covéa stands to secure only €153 million of the original $200 million target size for the Hexagon III Re catastrophe bond.
The Class A tranche of notes, which are the lower-risk layer, were first offered at €100 million in size to provide windstorm, hail storm and other natural peril event reinsurance cover, attaching at €450 million of losses and covering a €400 million layer of Covea’s reinsurance tower.
The Class A notes have an initial expected loss of 1.83% and were first offered to investors with coupon guidance in a range from 2.5% to 3%.
The target size was then proposed as between €100 million and €125 million of protection for the Class A notes, but with price guidance dropped to the lower-end of 2.5%.
In the end, just the original €100 million of protection was secured from the Class A notes, with pricing finalised at the low 2.5% mark, offering a very thin multiple to investors which perhaps explains the inability to lift this tranche in terms of size.
The Class B notes were first marketed as a €100 million layer, covering just windstorm risks and attaching much lower down at €50 million.
As a result, the Class B tranche notes came with an 8.05% initial expected loss and were first offered to cat bond investors with price guidance of 9% to 9.5%.
This pricing was clearly too low to encourage cat bond investors to allocate to the deal, so at the last update the target size changed to between €50 million to €65 million and the price guidance rose relatively significantly to 11%.
At final pricing we understand that the Class B tranche of notes have now been fixed at just €53 million in size, while the coupon was fixed at the raised level of 11%.
So, the Class A notes hit their initial target size and this was secured at reduced pricing and a very thin multiple-at-market, but the Class B notes struggled and experienced a roughly 19% price hike from the initial guidance midpoint.
So the multiple-at-market for the lower-risk Class A notes was just 1.37 times the expected loss, while the riskier Class B notes will now also pay investors a multiple of around 1.37 times EL.
What can we learn from this? That European property catastrophe risks, where they cover regions that haven’t been affected by the floods this year, are likely set to still see very low pricing at the reinsurance renewals, in terms of a multiple of expected loss.
That multiple may be up slightly on prior years, but the difference looks marginal. The catastrophe bond market may offer a slightly lower price for these risks than traditional reinsurance, but the appetite is clearly limited when it comes to such low-multiple deals.
As a result, we don’t expect to see a wave of European property cat bonds anytime soon, as the region remains underpriced in the opinions of many cat bond fund managers we’ve spoken to.
Such thin multiples leave little room for margin on the reinsurance side either, so appetites for European cat risks are likely to remain concentrated among the largest and most diversified players, it seems.