French mutual insurance society Covéa Group is returning to the capital markets to sponsor its second catastrophe bond deal, a €100 million deal that seeks all-natural perils reinsurance coverage for the firm, in a Hexagon II Reinsurance DAC (Series 2019-1) issuance.
This Hexagon II Re catastrophe bond is the first full 144a cat bond since June, so it’s encouraging to see the market coming back to life at this time. Reports suggest a robust pipeline of deals for the run up to year-end reinsurance renewals, of which this is the first seen.
For Covéa Group, its second cat bond is again looking to secure a level of reinsurance coverage from the ILS market that has not been seen before.
With its first cat bond, the €90 million Hexagon Reinsurance DAC (Series 2017-1), Covéa secured European windstorm reinsurance on an annual aggregate basis, which was a first for the market.
This new Hexagon II Re cat bond will also push the boundaries of cat bond coverage, in that it is effectively a European all-natural perils deal, the first ever seen, sources told us.
Hexagon II Reinsurance DAC has been registered in Ireland for the purpose of issuing a single Series 2019-1 tranche of catastrophe bond notes, which will be sold to institutional investors and ILS funds, providing the collateral to fund a reinsurance agreement to protect Covéa Group entities.
This Hexagon II Reinsurance catastrophe bond will protect a range of Covéa Group insurer entities and subsidiaries against losses from windstorms and any other natural peril events across a four-year term, with the covered entities including three named insurers MMA IARD SA, MAAF Assurances SA and GMF Assurances as well as other entities within the Group.
The covered area for the transaction includes mainland France, Monaco and Andorra, but not the overseas territories of France.
The reinsurance protection this cat bond provides will be on an ultimate net loss and per-occurrence basis.
The addition of what are termed “other events” is effectively almost an all-natural perils cover, as it includes a wide range of potential weather related exposures that may be caused by snowfall, earthquake, frost, ice, flooding, volcanic risks, mudslides and avalanches.
All-natural peril coverage is something that the ILS market provides through collateralised reinsurance, so by bringing this to cat bonds it makes the coverage they provide increasingly useful to cedants and comparable to their traditional reinsurance cover.
As long as investors are compensated for the risks, including for any unmodelled perils involved (of which there will definitely be some), transactions like this should find ample support in the ILS investor community.
We understand from sources that the transaction is being market as a €100 million deal, but that the notes would attach at €200 million of losses to Covea and cover losses up to €500 million. Given that’s a €300 million layer of the insurers reinsurance program, there is plenty of room for the transaction to be upsized if investors demand is there to support it.
We’re told that this equates to a 5.9% attachment probability and a 3.65% expected loss.
The Hexagon II Reinsurance notes are being offered to investors with price guidance in a range from 5.15% to 5.65%, suggesting a multiple at market of around 1.5% at the mid-point of this range.
We understand the transaction will likely settle at the beginning of November, giving plenty of time for investor meetings and marketing to be undertaken.
The practically all-natural perils nature of the protection is certain to require more due-diligence and modelling from investors, but given the sophistication of most ILS fund managers this is unlikely to be stretch for them to allocate to.