15 May 2015ILS

Compass Re II to issue unusual cat bond for AIG

American International Group (AIG) will use Bermuda-domiciled vehicle Compass Re II to issue a new and unusual cat bond that that will provide just six months of coverage to the insurer.

The deal, believed to be in the region of $200 million, is designed it protect it against US wind risks.

But it will provide protection to AIG for just six months – during the official Atlantic hurricane season from June 1 to November 30. The bond’s expected maturity is December 8, 2015.

The deal is also unusual in that it uses a parametric trigger, the first time such a structure has been applied to a US wind bond since 2009. The deal is structured on a per-occurrence basis using a parametric index trigger constructed using event parameters reported by the National Hurricane Center.

The notes may be extended to June 8, 2016 if certain qualifying events occur, or at the discretion of AIG. However, the Notes are not exposed to any further catastrophe events during this extension.

For AIG, this bond, using this trigger, would pay out quickly and give it almost instant capital if a big hurricane were to strike anywhere between the Gulf and the East coast of the US.

Protection will kick in at a parametric index value, calculated based on the event parameters, from an index level of 100 up to exhaustion at an index level of 150.

AIR Worldwide has modelled this cat bond and Fitch has provided its rating of B+ to the bond.

Noteholders are exposed to principal loss if the Event Index Value exceeds 100.0 and face total principal loss if the Event Index Value reaches 150.0. Assuming maximum sustained wind speeds of 100 mph and a 100 mile radius, the notes would be triggered if a wind storm crosses certain parts of New Jersey coastline, but no other areas along the U.S. coastline, Fitch said.

Increasing the wind speed to 130 mph while maintaining the 100 mile radius, the notes could be vulnerable if landfall occurred to certain parts of the Texas, Florida, Virginia and New York coastline. A category 4 hurricane is defined with wind speeds in excess of 130 mph, Fitch explained.