An unusual cat bond issued by Bermuda vehicle Compass Re II has been embraced by investors it seems despite it pushing the boundaries on several fronts.
The deal, which will provide just six months of protection to AIG during the official Atlantic hurricane season from June 1 to November 30, has been increased in size during the marketing period to $300 million from $200 million on the back of strong investor demand, a source said.
The deal, which closes on June 1, is also unusual in that it uses a parametric trigger, the first time such a structure has been applied to a rated US wind bond for many years.
With such a short duration, the deal was always something of an experiment for AIG. At the other end of the spectrum, 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.
But it appears investors have embraced this six month deal.
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.
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.
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.
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 also the first to be structured by Rewire Holdings and marketed using its new online marketplace.
Compass Re II, AIG, cat bond, ILS