Catastrophe bond market participants will be pleased to see a new cat bond deal come to market during these typically lean summer months when primary issuance slows down. The new cat bond transaction, which is the 21st deal of the year according to our Deal Directory, is being issued through Bermudian special purpose insurer Eurus III Ltd. on behalf of sponsoring reinsurer Hannover Re and subsidiaries and is structured to provide them with European windstorm protection on a per occurrence basis.
Eurus III Ltd. is the third transaction in a series of Eurus cat bond deals which have been issued by Hannover Re. All of them have been European windstorm cat bonds, with the first Eurus Ltd. being issued in 2006 and Eurus II Ltd. being issued in 2009. Eurus II matured in April of this year leaving Hannover Re without any cat bond cover for European windstorms, hence this latest Eurus III cat bond replaces that cover and is coming to market well in advance of the next windstorm season starting in Europe.
Eurus III will provide protection to three named entities of the Hannover Re group, Hannover Rückversicherung AG, E+S Rückversicherung AG and Hannover Re (Bermuda) Ltd. The risk period runs from the end of September 2012 to the end of March 2016, thus providing Hannover Re with a source of cover for four windstorm seasons in Europe. Protection will be afforded on a per occurrence basis over the risk period and the transaction will utilise an industry loss trigger based on a PERILS index of loss estimates.
The transaction will provide windstorm cover in the following countries; Belgium, Denmark, France and Corsica, Germany, Republic of Ireland, Luxembourg, The Netherlands, Norway, Switzerland, Sweden and the UK. The PERILS industry loss index will be resolved down to Cresta zone level for all countries except for Norway where it will be resolved by county.
The transaction covers any qualifying windstorm event occurring during the risk period. The industry loss trigger is on a per occurrence basis and the notes have an initial index attachment point of 161 and exhaustion point of 236. The attachment probability is said to be 2% in the first year and the expected loss is said to be 1.42%.
A single tranche of Series 2012-1 Class A notes will be issued by Eurus III Ltd. The deal has an initial size of €75m but will be upsized if the appetite in the market is sufficient and the cover can be written at a reasonable cost to Hannover Re.
The notes sold through this transaction will collateralize the underlying reinsurance agreements with each of the Hannover Re subsidiaries for the cover. Collateral from the proceeds of the sale of the notes issued by Eurus III Ltd. will be invested in European Bank for Reconstruction and Development (EBRD) notes.
We’re told by sources that the transaction is being marketed with an expected coupon range of 4%-4.5%.
Standard & Poor’s have given the single tranche of Series 2012-1 Class A notes being issued by Eurus III Ltd. a preliminary rating of ‘BB-‘.
It’s encouraging to see Hannover Re returning to the cat bond market to secure another source of multi-year, collateralized European windstorm cover. Both of their previous Eurus cat bond deals completed at €150m so we believe there is a good chance that Eurus III will upsize before close. Interest in Eurus III from ILS investors should be high as it offers a diversification opportunity at a time of slow primary issuance. There will likely be significant capital interest available should Hannover Re want to increase the size of the deal.