18 May 2015ILS

No guarantee for AIG ILS offering: Fitch

AIG’s latest insurance-linked security offering is likely to test investor appetite but there is no guarantee that it will succeed in placing the unusual $200 million deal, according to Jeff Mohrenweiser, senior director at Fitch.

The rating agency has assigned a rating of B+ to the $200 million Bermuda-domiciled vehicle Compass Re II, which will provide just six months of coverage to AIG: covering only the six-month long official Atlantic hurricane season from June 1 to November 30.

It would be the shortest duration of any cat bond. Mohrenweiser said this is another example of an issuer testing the parameters of the market.

But he notes that Allstate, another US insurer, was recently forced to pull Sanders Re 2015-1, a $130 million cat bond designed to provide it with seven years of coverage. It eventually found coverage in the traditional markets.

“There has never been a six month bond before and only time will tell if investors like it or not,” Mohrenweiser said. “You never quite know with these deals until the marketing starts properly. Certainly when you consider that Allstate failed in looking to launch a deal with a long duration, it is not guaranteed that this deal will be placed successfully.”

The deal is also unusual for several other reasons, Mohrenweiser said.

It uses a parametric trigger, which would mean it get pay out quickly and in full if an event occurs. This is the first time this has been used on a US wind bond for at least five years, however, with issuer’s tending to prefer indemnity triggers in recent years. These take longer to calculate and thus a pay-out to occur but the pay-out is more likely to match exact losses.

“It has been a while since we have seen this type of trigger on a wind bond,” he said. “Some indemnity deals now use a structure where this is an initial payment but parametric should be the better structure for the full pay-out to be completely quickly.”

The deal is also interesting because it is structured as a zero coupon bond meaning investors receive their premium at its maturity rather than through quarterly coupon payments. While this is common in the world of corporate and government bonds, it is unusual in the world of ILS. “It is a clean, simple structure I suppose,” said Mohrenweiser.

Finally, he said that the deal is also noteworthy because it is the first to be structured by Rewire Holdings and marketed using its new online marketplace. He believes that AIG may have been attracted to working with Rewire because of its fresh approach to this sector.

“In a space dominated by a handful of large players, it is nice to see a new entrant and doing something innovative,” Mohrenweiser said. “There is an element of creativity to this deal that some in the market are clearly looking for.”