The second catastrophe bond to be sponsored by French mutual insurance society Covéa Group looks set to increase in size, perhaps to as much as €130 million, but at the same time the price guidance has been slashed to the lowest end of the Hexagon II Reinsurance DAC (Series 2019-1) transactions marketed range.
Insurance-linked securities (ILS) and catastrophe bond funds and investors may be a little disappointed by the slip in pricing guidance, as the market had been hoping for more concerted firming across all regions and perils after the losses of recent years.
But with European perils and reinsurance generally in the region still in the doldrums, in pricing terms, the cat bond market likely needs to be as competitive as traditional reinsurance providers would be to secure this layer of risk.
That’s not to detract from what will be disappointing for many and we’d imagine a number of cat bond funds may elect not to invest at the reduced price guidance, given their desire to see higher pricing pushed through the ILS market.
To recap, the Hexagon II Re 2019-1 catastrophe bond from Covéa Group was launched recently as a €100 million deal, seeking collateralised reinsurance coverage against French windstorms and all natural perils for the mutual insurer.
The covered area for the transaction includes mainland France, Monaco and Andorra, but not the overseas territories of France, while 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 exposures, from snowfall, to earthquake, to frost, ice, flooding, volcanic risks, mudslides and avalanches. We’re told that the deal terms state that an “other event” includes all of the above, but is not limited to them, suggesting almost any natural peril loss could be covered by this cat bond.
As a result this is likely the first European all-natural perils catastrophe bond deal and unmodelled perils are a feature of it.
You might have though the pricing would have remained strong, but we understand that at the same time as upsizing, the deal is now offering investors between €110 million and €130 million of notes, the pricing guidance has been slashed to the bottom of the launch range.
The single tranche of notes to be issued by Ireland domiciled Hexagon II Reinsurance DAC, which have a 3.65% initial expected loss, were at first offered to investors with a coupon price range of 5.15% to 5.65%.
We’re now told that the price guidance has been reduced to the bottom of that range, with the up to €130 million of notes now offered with pricing of 5.15%.
That’s a multiple based on the initial expected loss of just 1.4 times, which seems very competitive for an all natural perils cat bond deal that features some unmodelled risk exposure.
But again, this is a European peril and catastrophe reinsurance rates in Europe are extremely low and have been for some time, having not bounced at all really since the heavy losses of the last two years.
As a result, it’s not all that surprising to see the first European cat bond pricing down during the marketing of the transaction.