Non-life insurance and reinsurance group Amlin plc has a new catastrophe bond in the market, with the launch yesterday of Tramline Re II Ltd. (Series 2014-1), as it seeks to renew a soon to mature slice of capital markets cat bond protection.
Amlin AG, the Swiss based reinsurance subsidiary of Amlin plc, is to sponsor its third catastrophe bond transaction with this deal, we understand. Of the two previous deals, the $150m Tramline Re Ltd. (Series 2011-1) from December 2011 and the $75m Tramline Re II Ltd. (Series 2013-1) from mid-2013, the 2011 transaction is scheduled to mature in January 2015.
As a result it seems Amlin is returning to the cat bond market in the hopes of renewing this slice of protection it benefits with from the capital markets. There is also a good chance in the currently attractive cat bond issuance conditions that the re/insurer will choose to upsize its cat bond protection and secure a larger layer than the maturing bond.
In this deal Bermuda domiciled special purpose insurance vehicle Tramline Re II Ltd. is seeking to issue a single $150m tranche of Series 2014-1 Class A notes. The sale of the notes will be used to provide fully-collateralized reinsurance protection to Amlin AG over a four-year terms to the end of 2018.
The single tranche of Tramline Re II 2014-1 cat bond notes will be exposed to U.S. named storms (so tropical storms and hurricances), U.S. earthquakes and European windstorms, all on a per-occurrence basis. All three perils feature an industry loss index trigger, with the U.S. named storm and earthquake coverage using a PCS state weighted index trigger and the European windstorm coverage using a PERILS country weighted index trigger.
This transaction is a much higher risk layer of cat bond notes than the majority of the recent deals to come to market. We understand that the notes initial attachment probability is 6.68%, exhaustion probability is 3.97%, while the expected loss is 5.12%. The notes will attach at an index calculation level of 500 and exhaust at 700 on the index, we’re told.
In terms of pricing guidance, we understand that the $150m of Tramline Re II 2014-1 notes are being marketed to investors with a coupon range of 10% to 10.75%.
Now, here’s where this deal gets interesting and again it’s related to pricing. Comparing the multiple of Amlin AG’s maturing cat bond deal from 2011 with this new one shows that the pricing is very keen. The Tramline Re Ltd. 2011-1 cat bond had an expected loss of 3.49%, so by the modeling was lower risk, but paid a coupon of 16.75%, so a much higher coupon. That resulted in a multiple of about 4.8 times the expected loss.
This new Tramline Re II 2014-1 cat bond shows just how much pricing and investors ability to assume risk has come in since 2011. With its expected loss of 5.12% and potential coupon in the range of 10% to 10.75%, the resulting multiple of this new cat bond could be from 2.1X to 2X the expected loss, which is low.
It will be interesting to see how investors respond to this opportunity to secure a higher yielding slice of cat bond notes and whether they are accepting of the low multiple. For some investors this will likely be fine, as the risk could be diversified away within an ILS or cat bond portfolio to a degree, but we’d imagine there will be others that will not find this bond a fit for their portfolios at this time due to its risk return profile.
This cat bond is being brought to market by Aon Benfield Securities, as sole structuring agent and bookrunner for the deal, while AIR Worldwide are providing the risk modelling services.
This transaction has just been launched and won’t complete until well into December, it seems, coming on risk for the 1st of January. It will be interesting to see how this deal prices and also whether Amlin takes the opportunity to upsize it, as it could clearly offer the re/insurer a big saving on the maturing layer of protection.