Covéa’s Hexagon III Re cat bond target lowered, as pricing diverges

Covéa Group, the French mutual insurance society, has had to reduce its target for the Hexagon III Re Pte. Ltd. (Series 2021-1) catastrophe bond transaction slightly, as pricing has diverged between the two tranches and the issuance is now said to be aiming to secure the company between €150 million and €190 million of reinsurance.

It’s a mixed outcome, as the lower-risk tranche of cat bond notes being issued by Singapore based special purpose reinsurance vehicle Hexagon III Re Pte. look set to price at the bottom-end of guidance, but the higher risk layer required a relatively significant price hike to be applied in order to get investors interested in backing the deal, we’re told.

The Hexagon III Re catastrophe bond was launched recently and saw Covéa aiming to secure €200 million of reinsurance from the capital markets to cover losses from some of its European peak perils.

The deal was hoped to provide €200 million collateralised reinsurance 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), from a twin-tranche issuance and with coverage on an indemnity and per-occurrence basis, across a four-year term.

Coverage is across mainland France, Monaco and Andorra.

We explained when we first covered this transaction that the multiples-at-market being offered looked very low, especially for the riskier layer of cat bond notes being issued.

Investors seem to have agreed on the higher-layer at least, with price guidance rising relatively significantly for that layer.

When the Hexagon III Re cat bond was first offered to investors it featured a €100 million Class A tranche of notes that would 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%.

We’re now told that the Class A notes are targeting between €100 million and €125 million of protection for Covea, but that the price guidance is now fixed at the lower-end of 2.5%.

That remains a very low multiple, likely reflecting reinsurance price expectations for the more remote, higher layers of European reinsurance towers.

The deal also features what was a €100 million Class B tranche of notes that cover just windstorm risks and attach lower down at €50 million, so are the much riskier layer, and covering just a €100 million layer wouldn’t upsize.

The Class B tranche of notes come with an 8.05% initial expected loss and were first offered to cat bond investors with price guidance of 9% to 9.5%.

However, the target size for the Class B tranche has fallen, with €50 million to €65 million now sought, we’re told.

At the same time, the Class B notes are now being offered with a coupon of 11%, which is a relatively significant increase from the initial price guidance that was offered.

So overall the deal is now set to fall a little short of the initial target size, at up to €190 million, and while the lower-risk layer of notes will likely upsize at lower-than-guidance pricing, the riskier Class B layer will be smaller than hoped for and that layer of cover will cost more than anticipated, it seems.

Issuance of this Hexagon III Re cat bond is now expected to complete in December, having been a little delayed from its original target settlement date, we’re told.

Even at the higher pricing the riskier layer of notes is still a relatively low multiple for a peak peril, which shows that even if European property catastrophe reinsurance does firm at the January renewals, it may not be by all that much, it seems.

You can read all about this new Hexagon III Re Pte. Ltd. (Series 2021-1) catastrophe bond from Covea Group and every other cat bond transaction in our Deal Directory.