Tradewynd catastrophe bond benefitted from modelling disclosure

RMS, one of the world’s leading catastrophe modellers, states that it has pioneered a new approach to modeling indemnity catastrophe bonds, through its work with AIG and Swiss Re on the recently completed Tradewynd Re Ltd. (Series 2013-2) deal.

This is the second Tradewynd cat bond sponsored by AIG, the first was Tradewynd Re Ltd. (Series 2013-1) earlier this year. Typically the exposure data from a catastrophe bond transaction is only shared with one risk modeller who is contracted to provide the risk analysis for the deal. In the case of the latest Tradewynd, the exposure data underlying the catastrophe bond transaction was made available to the three main modeling firms to analyse independently.

RMS said that by allowing all three firms to analyse the data and provide insight back to investors and clients, each firm can present investors with a more accurate representation of the risk of the bond under multiple views.

“Not only did investors get RMS’ view of commercial and high-end residential risk on this bond, they also got unprecedented insights into the exposures driving the risk,” commented Peter Nakada, managing director of RMS capital markets.

“The market voted enthusiastically in favor of this approach, as evidenced by substantially tighter spreads and larger issuance than the prior Tradewynd bond with a nearly identical risk profile,” Nakada said. “Going forward, we will be happy to do detailed modeling for all indemnity bonds, even when we are not selected as the modeling agency providing the risk analysis for the offering documentation.”

RMS conducted its risk analysis for Tradewynd Re 2013-2 using its suite of hurricane and earthquake models. The models used includes the RMS Industrial Facilities Model, RMS Offshore Platform Hurricane Model and the RMS North Atlantic Hurricane Storm Surge Model, some of which will have been very important to enable investors to better interpret the risks of the diverse underlying portfolio ceded by AIG.

A multiple model view of the risks in catastrophe bond transactions is something that investors will certainly be keen to see provided again. Typically cat bonds are run through multiple vendor risk models but the underlying exposure data is often not available except to the modeller contracted to the deal meaning that the views of risk are not as comparable.

“The approach for this second Tradewynds transaction was to provide investors with a greater amount of information, particularly around the modeling,” commented Richard Pennay, an ILS structurer at Swiss Re Capital Markets, in an A.M. Best article. He added that this was something that had never been done before, saying that it; “Helped facilitate or enable the investors to better understand the underlying exposures of the transaction and it was very well received.”

For investors, having a true multi-vendor model view of the risk in any catastrophe bond they seek to invest in, including full transparency around the underlying portfolio exposure data, could be a very important development in the market for indemnity catastrophe bonds.

In the case of the Tradewynd deal, AIG made a very sensible decision to share its data as the portfolio contains some diverse and less well-modelled risks which makes the multi-model view even more valuable. The upsizing of the deal and the attractive pricing secured show that investors certainly appreciated this approach.