Non-life insurance and reinsurance group Amlin plc’s latest visit to the ILS market with the Tramline Re II Ltd. (Series 2014-1) catastrophe bond has resulted in pricing set at an extremely low level, below initial guidance and with a multiple below two.
With Tramline Re II 2014-1 Amlin will secure $200m of fully-collateralized reinsurance protection over a four-year term, for exposures to U.S. named storms (so tropical storms and hurricanes), U.S. earthquakes and European windstorms, all on a per-occurrence and industry loss basis. More details on the transaction specifics can be found in our Deal Directory.
When the Tramline Re II 2014-1 cat bond launched, it was targeting $150m of cover through the issuance of a single tranche of Series 2014-1 Class A notes. The deal upsized to $200m while it was being marketed, while the price guidance that launched at 10% to 10.75%, was narrowed and lowered to below initial guidance at 9.75% to 10%.
Now, at final pricing we’re told that Amlin has secured this cat bond cover at the lowest end of the reduced guidance, at a coupon of 9.75%. With the cat bond notes having an expected loss of 5.12%, that gives this deal an extremely low multiple, with the coupon set at just 1.9 X’s the expected loss.
Interestingly, of all the fourth-quarter catastrophe bonds to come to market this is the only one where price guidance has dropped to below the launch range. When we first covered this deal we noted that this is the highest risk and highest paying tranche of notes to come to market for a while, which could explain strong demand from certain investors keen to boost portfolio returns with a near double-digit cat bond note.
That might explain the appetite from investors that has helped the coupon to drop to below guidance. However, we suspect that this cat bond will not have been for everyone and we’d imagine a lot of investors declined the opportunity to allocate capital to this deal.
We should note though that at an expected loss of 5.12%, which at its most basic might be considered a 1 in 20 year risk, the pricing of 9.75% is actually better than we are hearing many rate-on-lines are in the traditional reinsurance market, or for other instruments such as industry loss warrants (ILW’s). Market sources suggest that they are seeing proposals for the January renewals with lower rates for a similar return period risk. This is a basic way to look at it, but it suggests that the return for the level of risk is at least comparable or perhaps better than those being seen in other natural catastrophe reinsurance layers lately.
Amlin’s Tramline Re II Ltd. (Series 2014-1) catastrophe bond completes in later this month, we will update you once the transaction is settled. You can read all about this and every other cat bond or ILS deal in the Artemis Deal Directory.