XL Catlin and its subsidiaries latest catastrophe bond, the $150m Galileo Re Ltd. (Series 2017-1) transaction, having been the first to market following the recent hurricanes is a good test of investor appetite and while investors are keen to take on more risk the coupon shows that this is not at any cost.
Launched recently, the new Galileo Re 2017-1 cat bond features two tranches of notes, one much higher risk than the other, which will collateralize multi-peril reinsurance agreements for the sponsor across a three-year term.
Both tranches feature a weighted industry loss trigger and cover U.S. named storms (including the added Puerto Rico), U.S. earthquakes, Canadian earthquakes, U.S. severe thunderstorms, European windstorms, Australian tropical cyclones and Australian earthquakes on an annual aggregate basis.
It’s a broader range of perils than seen in other recent cat bonds from XL and the addition of Puerto Rico coverage for named storm is no surprise following the impacts of hurricane Maria. For XL it makes sense to try to lock in more retrocession and reinsurance at attractive rates before the cat bond market comes alive towards the end of the year.
Demand has been highest for the higher risk tranche of notes, we’re told, although this is not at any price.
When the Galileo Re 2017-1 cat bond was launched earlier this month the transaction was split into a $100 million Class A tranche of notes, which are the least risky with their expected loss of 3.37% and were offered to cat bond investors with coupon guidance in a range from 7.5% to 8%.
The much riskier Class B tranche of notes, with an expected loss of 9.72%, were preliminarily sized at $50 million and offered to investors with price guidance of 17% to 17.5%.
Now, according to Artemis sources, the demand appears to have been highest for the higher risk tranche of notes.
The Class A tranche has dropped in size to $75 million, we’re told, while their price guidance has been fixed at the low end of guidance at 7.5%.
But the riskier Class B tranche has increased in size, to $75 million, however their price guidance has moved to the top of the marketed range at 17.5%.
It’s an interesting result, as it shows lower demand for the lower risk notes, although investors were prepared to accept a tightening of the spread on that Class A tranche.
But for the higher risk note the demand has clearly been higher, although investors have also demanded a higher spread, pushing the coupon to the top of the previously marketed range.
This dynamic could reflect ILS investors desire to access higher returning business, in order to boost portfolio returns at a time when a significant portion of the outstanding cat bond market has been marked down.
At $150 million in size this XL sponsored catastrophe bond will be the smallest the company has ever sponsored though, which perhaps says something more broadly about investor demand for new ILS and cat bonds at this time, likely due to the complexity of recent losses meaning making new investments is perhaps not as easy as when the market is not stressed.
It may be that investors had been hoping for a higher price increase from this deal, particularly as the peril expansion actually means that on a risk adjusted basis this latest Galileo Re cat bond was not offering much increase over previous deals at all.
There is still a chance the transaction could increase in size, but we understand that marketing ends today and the notes will be priced later, meaning it is likely to remain at $150 million and with this adjusted pricing.
We will update you as the Galileo Re Ltd. (Series 2017-1) catastrophe bond transaction from XL Catlin moves towards completion and you can read about this and every other cat bond transaction in the Artemis Deal Directory.