Insurance and reinsurance company Argo Group is returning to the catastrophe bond market for what will be its third deal, seeking a four-year source of multi-peril reinsurance protection from the capital markets through Loma Reinsurance (Bermuda) Ltd. (Series 2013-1).
Sources told Artemis that for its third catastrophe bond deal Argo Group has established a new Bermuda domiciled special purpose insurer, Loma Reinsurance (Bermuda) Ltd. This is Argo’s first transaction for two years, since December 2011 when it issued Loma Reinsurance Ltd. (Series 2011-2), before which it had issued Loma Reinsurance Ltd. (Series 2011-1) in the same year, coming to market in June 2011.
In this first Series 2013-1 issuance through Loma Reinsurance (Bermuda) Ltd. Argo is seeking a four-year source of reinsurance and retrocessional protection from capital market investors against tropical cyclones, U.S. earthquakes and U.S. severe thunderstorms on an annual aggregate basis, we understand. The preliminary size of the deal is said to be at least $100m.
We’re told that the transaction uses a novel trigger, which we believe to be the first of its kind in a 144A cat bond issuance, a combined indemnity and industry loss trigger. We’re told that the trigger will be derived from the sum of ultimate net loss to Argo’s U.S. business and Syndicate 1200 and insurance industry losses, as reported by Property Claim Services (PCS), weighted by region and the amount of industry losses attributable to Argo Re.
That’s an interesting trigger construction, which perhaps seeks to reduce basis risk against the industry loss measure but at the same time ensure that coverage is sufficiently broad on an industry loss basis to cover all eventual scenarios where by Argo Re would become responsible for paying its insureds claims. It also allows Argo to combine reinsurance for its insurance businesses and retro for Argo Re within a single transaction.
Argo will retain a 10% share of losses within each risk period, we understand and a franchise deductible of $15m is applied. The ultimate beneficiaries of this cat bond will be Argo Group subsidiaries Argonaut Insurance, Argo Re and Lloyd’s Syndicate 1200.
Three classes of notes are being issued, we understand, a Class A tranche with an attachment point of $425m and exhaustion at $475m, Class B with an attachment point of $325m and exhaustion at $425m and Class C with an attachment point of $225m and exhaustion at $325m. That suggests that this deal could grow to $250m across the three tranches if investor demand allows.
The Class A notes have an attachment probability of 4.13%, an expected loss of 3.77%, an exhaustion probability of 3.43% and are being offered with price guidance of 10.5% to 11.5%.
The Class B notes have an attachment probability of 6.04%, an expected loss of 5.02%, an exhaustion probability of 4.13% and are being offered with price guidance of 12.75% to 13.75%.
Finally, the Class C notes have an attachment probability of 10.32%, an expected loss of 7.95%, an exhaustion probability of 6.04% and are being offered with price guidance of 17.5% (no guidance range offered with this tranche we are told).
These three tranches of notes all offer investors an attractive opportunity and will likely be well received as we approach the end of the year. It will be interesting to see whether they upsize and whether pricing moves as the deal is marketed.
The transaction features a variable reset mechanism, allowing Argo more flexibility should it opt to adjust the coverage provided by this layer during the term of the cat bond deal.
Swiss Re New Markets are structuring and marketing this deal, while AIR Worldwide are providing risk modelling and Property Claim Services (PCS) are the reporting agency for industry loss events.
We understand that the transaction is aiming to complete before the end of the year, which will add to the 2013 issuance total.
Loma Reinsurance (Bermuda) Ltd. is an interesting transaction, not least because of the combination of indemnity and industry loss index within the trigger. It will be interesting to see how this is received by the investor community. As a new trigger it will likely come under a deal of scrutiny, however the reduction of industry loss basis risk through the combining of a UNL feature may prove very attractive.
We’ll keep you updated as Loma Reinsurance (Bermuda) Ltd. (Series 2013-1) progresses to market for Argo Group. The transaction has been added to our catastrophe bond and ILS Deal Directory and the entry will be updated as more details emerge.