Argo Re, a Bermuda based reinsurer and part of the larger Argo Group, has begun marketing a its first multi-peril catastrophe bond through a Cayman Islands special purpose insurer Loma Reinsurance Ltd. It’s the first primary market cat bond to be issued for a while and is sure to test both investor appetite and the markets willingness to assume risk after the catastrophic start to the year.
Loma Re is issuing a single tranche of Series 2011-1 Class A notes (believed to be seeking at least $100m) designed to cover Argo Re’s losses from certain qualifying catastrophes on second and subsequent hurricanes and on a per-occurrence basis over an 18 month period. Covered perils are earthquakes in the U.S., windstorms in Europe, and earthquakes in Japan, each of which has an activation point which if reached puts the notes on risk for subsequent events and a loss trigger level which if reached causes losses to the investor noteholders.
Under the terms of the deal Argo Re will cede certain risks to Loma Reinsurance Ltd. who will then enter into a repurchase agreement with Goldman Sachs which will see them sell Loma Re a pool of eligible securities which will be overcollateralized. Proceeds of the sale of the notes will be entered into a collateral account. Goldman Sachs as repurchase counterparty will pay a three-month interest payment equal to LIBOR while Argo Re will pay a quarterly reinsurance premium which will equal the spread above LIBOR due to investors.
The risk modelling for the Loma Re cat bond uses AIR Worldwide’s latest model. All of the modelled perils include demand surge, U.S. hurricanes include 10% of coastal storm surge losses (except for Hawaii) and both U.S. and Japan quake include fire following (except for Alaska and Hawaii). U.S. hurricane and earthquake use a trigger based on PCS reported index of insured industry losses, European windstorm risks use the PERILS index-based industry loss data and for Japanese earthquakes AIR Worldwide will use data from the Kyoshin Network (K-NET) for event parameters and their model to determine a parametric loss index.
The transaction has no annual reset and there will be a single risk period of 18 months running from the deals close (expected mid to late June) to late December 2012. There have been a number of historical catastrophe events which would have triggered the deal as it is structured (including hurricanes Andrew and Katrina, European windstorm Lothar and possibly the recent Tohoku earthquake) however never have two qualifying events occurred within an 18 month period which would cause a loss to investors. As such this deal offers Argo Re protection against the kind of peak peril events that catastrophe bonds were designed to cover.
Standard & Poor’s have given the single tranche of notes a preliminary rating of ‘BB-‘.
This is an interesting cat bond transaction and offers investors a great chance to achieve some diversification at a time when capacity is much-needed. Investors and funds have capital to put to work thanks to recent capital raising activities by some and the maturity and redemption of a number of cat bonds. Once this deal completes successfully it will send a positive signal to potential issuers who may be encouraged (especially by seeing a new first time issuer tap the cat bond market) to bring their deals to market sooner than they would normally given this time of year is usually slow in the primary market as hurricane season has begun.
Full details of this transaction will be available in our catastrophe bond Deal Directory and we will update you as the Loma Re transaction comes to market.