Providing a useful indicator of the appetite of insurance-linked securities (ILS) and catastrophe bond investors, the €90 million Hexagon Reinsurance DAC (Series 2017-1) catastrophe bond issuance, sponsored by French mutual insurance society Covéa Group, has seen its pricing drop to below the initial guidance range.
The fact pricing has dropped to below the range that had been at first marketed to investors suggests high demand for the notes and a willingness among cat bond investors and fund managers to take on this European windstorm risk at lower returns, another sign that cat bond investor demand has not been dampened by recent catastrophe losses.
The Hexagon Reinsurance cat bond launched just over a week ago and sees the Covéa Group looking for collateralized reinsurance protection from European windstorms across a four-year term for its subsidiaries, with coverage extending across France, Andorra and Monaco on an indemnity trigger and annual aggregate basis.
The Hexagon Re cat bond features two tranches of Series 2017-1 notes, both sized at €45 million, a figure which hasn’t changed, to provide Covéa and its entities with €90 million of capital markets backed reinsurance protection.
The €45 million Class A tranche of Series 2017-1 notes, which are the more risky having an expected loss of 6.75% launched with coupon pricing in a range from 8.25% to 9%, but we now understand that this tranche are being offered with price guidance of 8% to 8.25%.
The €45 million Class B tranche of Series 2017-1 notes, a less risky layer with an expected loss of 5.52%, launched with price guidance of 6.75% to 7.5%, but this has also dropped to below that initial range to 6.5% to 6.75%.
So the Hexagon Re 2017-1 cat bond notes could end up pricing at the very bottom of initial guidance, or below, either of which would be a good result for the sponsor, given it is the first time Covéa has tapped the cat bond market for its reinsurance coverage.
The pricing indicated by these tranches could also encourage other cat bond sponsors to come forwards, particularly with European windstorm risks which are not as frequently transferred to cat bond investors anymore.
It’s important to note though, that this pricing reflects the fact that the cat bond collateral will be invested in IBRD notes, to offset the negative return of the Eurozone’s interest rates.
We’ll update you when the final pricing information is available.
Join us in New York in February 2018 for our next ILS conference