XL Catlin and its subsidiaries are the first sponsor to return to the catastrophe bond market after the recent hurricane losses, according to sources, launching a $150 million Galileo Re Ltd. (Series 2017-1) transaction with pricing that looks a little higher than other recent similar multi-peril cat bond issues.
Coming so soon after the impacts of hurricanes Harvey, Irma and Maria, which have caused investors in insurance-linked securities (ILS) such as cat bonds and reinsurance linked assets significant losses, it is to be expected that coupon prices would rise somewhat and with this new cat bond it looks like XL Catlin is ready to compensate investors with an increase in multiple for this deal.
The Galileo Re 2017-1 cat bond is structured into two tranches of notes, one much higher risk than the other and both seeking to secure fully collateralized multi-peril reinsurance protection for the sponsor across a three-year term.
Both tranches of notes are structured with a weighted industry loss trigger and coverage will be on an annual aggregate basis, for the perils of U.S. named storms, U.S. earthquakes, Canadian earthquakes, U.S. severe thunderstorms, European windstorms, Australian tropical cyclones and Australian earthquakes.
This is the first of XL Catlin’s cat bonds to include severe thunderstorm protection, as the company looks to add reinsurance and retrocession for tornado and severe convective storm risks to its multi-peril and multi-year protection with this transaction.
The cat bond is targeting $150 million or reinsurance and retrocessional protection for XL Catlin and various subsidiaries, including its activities at Lloyd’s. XL Bermuda Ltd. is acting as sponsor, but the deal will protect a wide-range of XL companies.
A Galileo Re 2017-1 Class A tranche of notes has a preliminary size of $100 million, would attach at $360m and exhaust at $560m, with an initial attachment probability of 5.13%, expected loss of 3.37% and is being offered to cat bond investors with price guidance in a range from 7.5% to 8%, we understand.
A $50 million sized Class B tranche of notes would attach at $160m and exhaust at $360m, so sitting beneath the A notes, with an initial attachment probability of 17.53%, an expected loss of 9.72% and a much higher coupon, with price guidance in a range from 17% to 17.5%.
Both classes of notes will have a franchise deductible of $40 million and as each will cover a $200m layer of risk there is plenty of room for them to be upsized, should investor demand allow.
In terms of how the pricing compares to recent XL sponsored cat bond deals, a rudimentary look at the expected loss and coupon shows that the multiples look likely to be higher with these new tranches of notes.
A tranche of the most recent XL cat bond deal, the Galilei Re 2017-1 transaction, had an expected loss of 4.55% and only paid investors an 8% coupon, so had a multiple of 1.76 times the EL.
The Class A tranche from this Galileo Re 2017-1, with its 3.37% expected loss and pricing range of 7.5% to 8%, would have a multiple of 2.23 times the EL even at the bottom end of pricing, so seems a slightly higher level of pricing.
The riskiest tranche of the Galilei Re 2017-1 deal had an expected loss of 8.65% and paid investors a coupon of 13.25%, so offered a multiple of 1.53 times the EL.
Meanwhile the Class B tranche of this new offering has an expected loss of 9.72% and if priced at the bottom of the 17% to 17.5% would still pay investors a 1.75 times EL multiple, which again seems a little higher level of pricing for a riskier layer of notes.
That’s a very rudimentary look at pricing from the limited information we have available to us. To derive the true increase in pricing a proper risk adjusted assessment needs to be undertaken and given this new deal features a new covered peril, perhaps the risk adjusted increase is not as great as you might think.
But, at first glance, it does look like this new catastrophe bond from XL Catlin will offer a better pricing multiple than other recent cat bonds, reflecting the fact ILS investors have faced losses and so are looking to receive higher coupons for future cat bond deals.
In fact some of XL’s in-force cat bonds are deemed at risk, should industry loss estimates from the recent hurricanes rise, so investors could be supporting XL in paying its losses in weeks to come and it stands to reason the company would recognise the need to uplift the coupons offered on its first deal since these loss events.
Being the first catastrophe bond since the recent hurricane losses, this will be a good test of ILS investor appetite for risk and just how much they feel pricing should rise by, following their losses. It will be fascinating to see where pricing settles for this deal.
We will update you as this Galileo Re Ltd. (Series 2017-1) catastrophe bond transaction from XL Catlin comes to market and you can read about this and every other cat bond transaction in the Artemis Deal Directory.