We’re told that the latest catastrophe bond to be sponsored by Hannover Re, the $100 million aggregate retrocession deal 3264 Re Ltd. (Series 2022-1), has now been priced and the coupon has fixed at the top-end of the already revised upwards guidance.
It’s the latest sign of ILS investors reaching a floor on pricing for aggregate and certain other catastrophe bond deals, with a number of issues pricing up in recent days.
This is quite different to the general trend towards upsizing of cat bonds, while pricing down, that had been seen across most of the third and fourth-quarter issuance of 2021.
The market has clearly reacted to recent catastrophe losses, as well as the additional challenges now posed by the recent tornadoes and to the fact traditional reinsurance and retrocession renewals are both late and proving challenging to close on. Which has perhaps driven some additional determination to hold-the-line on pricing among cat bond funds and investors.
Hannover Re returned to the catastrophe bond market just over ten days ago with what will be the second catastrophe bond from the reinsurance firm’s Bermuda special purpose insurance vehicle 3264 Re Ltd.
The issuance was $100 million from the start and that didn’t change during the marketing of this cat bond deal, so Hannover Re is set to secure the targeted minimum collateralized retrocessional reinsurance it had been seeking.
The $100 million tranche of notes that 3264 Re Ltd. will issue are now set to provide Hannover Re with a multi-year source of annual aggregate retro reinsurance.
The cat bond covers a particularly wide range of perils, including losses from U.S. named storms, thunderstorms, wildfires and winter storms, as well as U.S. & Canada earthquakes, European windstorms, Caribbean earthquakes, Japan typhoons and earthquakes, Italy earthquakes, Turkey earthquakes, Australian cyclones and earthquakes, and New Zealand earthquakes.
It’s one of the most wide-ranging, global peak peril cat bond issues ever seen and designed to provide Hannover Re with broad aggregate retro protection, across a roughly three year term to January 2025.
The $100 million tranche of Class A notes have an initial attachment probability of 14.27% and an expected loss of 7.95%.
They were first offered to cat bond investors with price guidance in a range from 17.5% to 18.5%.
But, as we explained yesterday, that guidance was narrowed and lifted to above that initial range, with the coupon subsequently offered to investors at between 18.5% and 19%.
Now, sources have told us that the $100 million of notes issued by 3264 Re Ltd. will come with a 19% coupon, so right at the top-end of the already revised upwards range.
It’s actually only a 5% increase in price from the initial guidance mid-point, but for a higher coupon deal this is a reasonable uplift.
As we said, this will be a reaction to the way retro reinsurance markets are at this time, especially for aggregate covers.
But there is likely also an element of ensuring investors feel compensated for taking on a particularly wide-range of peril exposures with this cat bond deal, as the worldwide, all peak peril nature of the cover is less familiar still in the cat bond market, while some of the covered perils are also less well-modelled.
But this is a positive result for Hannover Re, which has secured broad almost all-peak perils retrocession from the capital markets with this deal, which should be positive for it tapping the ILS market for future broad retro covers as well.
The kind of broad retro coverage this cat bond will offer is far more useful to a major global reinsurer like Hannover Re than the more typical worldwide multi-peril deals that used to largely only feature US wind/quake, Euro wind and Japan wind/quake.
Being able to secure an aggregate retro cover from the cat bond market that covers almost all of the global peak catastrophe perils is a far more useful product and one that fits more neatly alongside the rest of a reinsurers’ retro tower.
However, when you look at this cat bond’s pricing, alongside other recent deals that have also seen upwards movement in their coupons, it is also clear the cat bond market believes a pricing floor has been reached (for some risks and coverage structures).