Investors help Allianz lock in competitive price on Blue Danube II cat bond

German insurance and reinsurance group Allianz said that attractive market conditions combined with demand from investors for catastrophe bonds helped it lock in a competitive price on the recently completed Blue Danube II Ltd. (Series 2013-1) cat bond. Interest in the transaction was strong as capital markets investors came out in force to support Allianz.

With the successful completion of the Blue Danube II cat bond, which we announced here yesterday, Allianz now benefits from a new $175m three-year layer of fully-collateralized, multi-peril reinsurance protection. The deal provides Allianz with per-occurrence cover for named storms (so including tropical storms and hurricanes) in the U.S., the majority of the Caribbean and Central America including Mexico, as well as earthquake risks in the U.S. and all provinces of Canada.

The transaction uses a modified industry loss trigger (MITT), which takes industry loss estimates and weights them after the event against certain applicable modelled portfolios, for the US and Canada, and a more typical modeled loss trigger for the Caribbean and Mexico.

Allianz SE’s reinsurance division, Allianz Re, was responsible for structuring the transaction on Allianz’s side, with the actual sponsor being named as Allianz Argos 14 GmbH. Allianz said that the deal was oversubscribed, which helped it upsize from $150m to $175m before it closed. The pricing dropped by roughly -17% from an original coupon range of 4.75% to 5.5% and settled to offer investors an interest spread of 4.25% per annum over the permitted investments yield

“Cat bonds represent a key element of our protection landscape. The Blue Danube II Series 2013-1 issuance allows Allianz to lock in a competitive price over a period of three years for protection against natural catastrophes. Thus, we can benefit from the attractive conditions which result from the strong demand for cat bonds in the capital markets,” says Amer Ahmed, CEO of Allianz Re.

Ahmed continued by explaining the reason Allianz chooses to access the capital markets with cat bonds, saying; “Allianz uses cat bonds as an alternative and supplement to traditional catastrophe reinsurance. Allianz Re is responsible for managing the Group’s natural catastrophe exposures within a defined risk appetite. We do this by a using a variety of instruments and providers, in particular at times when capital in the reinsurance sector is constrained. Here cat bonds are attractive because they allow Allianz to diversify protection sources by accessing the capital markets as additional risk-takers. Cat bonds typically provide cover on a multi-year basis and are collateralized, thus they provide some stability and mitigate counterparty credit risk exposure.”

On the pricing that it achieved, Ahmed commented; “The bond allows us to lock in a competitive price over a period of three years for protection against natural catastrophes. Thus, we can benefit from the currently very attractive conditions which result from the strong demand for cat bonds in the capital markets. Given those conditions we decided to upsize the cat bond from the originally planned volume of 150 million US-dollars to 175 million US-dollars.”

Ahmed also explained that Allianz sees catastrophe bonds and the capital markets as an integral part of its risk transfer and reinsurance provision. He said; “Allianz has been active in the cat bond market since 2007 and intends to sponsor cat bonds from time to time to complement our traditional reinsurance covers, especially for so-called peak risks. We regularly review our coverage needs and risk protection options as well as our expectations regarding pricing. Hence, cat bonds are a key part of our risk management approach.”

Reinsurer Swiss Re underwrote the transaction and acted as joint book runner and joint structuring agent for the Blue Danube II cat bond on behalf of Allianz.

Jean-Louis Monnier, Director and Head of ILS Europe at Swiss Re Capital Markets, commented; “We are very pleased to continue to support Allianz SE’s access to capital markets capacity. This new transaction uses a “MITT” trigger and complements last year’s Blue Danube issuance, providing Allianz SE with a multi-year cover against named storm and earthquake losses in North America, the Caribbean and Mexico.”

Reinsurance broker Guy Carpenters capital markets GC Securities division acted as the other joint book runner and joint structuring agent on Blue Danube II. It noted that this is the second cat bond where Allianz has sponsored a deal using a PCS-MITT trigger, the first being last years Blue Danube Ltd. (Series 2012-1).

Overall this is the eighth catastrophe bond deal since 2007 which benefits Allianz. The others being; Blue Danube Ltd. (Series 2012-1), Blue Fin Ltd. (Series 4), Blue Fin Ltd. (Series 3), Blue Fin Ltd. (Series 2), Blue Coast Ltd., Blue Fin Ltd. and Blue Wings Ltd.

GC Securities noted the enhanced and expanded protection that Allianz now benefits from with the completion of Blue Danube II due to the expanded hurricane definition to include named storms, as well as adjustments to how losses in Mexico and the Caribbean are factored into the trigger.

David Priebe, Vice Chairman of Guy Carpenter and Head of GC Securities, commented on the deal; “The accelerated convergence between the capital markets and (re)insurance sectors coupled with Allianz’s consistent cat bond track record was a catalyst for Allianz capturing the attractive pricing and capacity for the Series 2013-1 Notes. GC Securities is honored to have assisted Allianz in the offering of the Series 2013-1 Notes.”

Cory Anger, Global Head of ILS Structuring, GC Securities, added; “Allianz’s experience as a repeat cat bond sponsor allowed it to take advantage of market conditions with respect to garnering favorable terms/conditions, pricing and capacity. For example, expanding the protection to a named storm basis for the U.S., Mexico and the Caribbean region was an important structural consideration for Allianz in the Series 2013-1 Notes. Investors have shown a willingness to embrace structural flexibility when given proper rationale.”

This is a really key point, that investors are more than willing to support unusual or different approaches, and will help sponsors expand the cover they seek, as long as there is a clear reason and explanation for it. As more deals seek expanded protection it will bring new elements of diversification to the market for investors as well.

Chi Hum, Global Head of ILS Distribution, GC Securities, said; “Capital markets investors came out in force to support Allianz again in the most recent Blue Danube II Ltd. bond issue. As a seasoned user of cat bonds, Allianz has been successful convincing investors to support customized risk and structural terms that are important coverage items in their overall reinsurance program. The oversubscription and broadly balanced book of investors on this cat bond issue will serve Allianz well as they seek to evaluate and optimize the benefits of capital markets capacity relative to traditional capacity.”

You can read much more about the Blue Danube II Ltd. (Series 2013-1) transaction in our catastrophe bond Deal Directory.