LONDON, Nov 1 (Reuters) - Europe’s second-biggest insurer Axa (AXAF.PA) has closed a 275 million euro catastrophe bond to cover it against potential losses from European windstorms, after twice upsizing the bond to meet heavy investor demand.
Axa will use Irish-based special purpose vehicle Calypso Capital to cover against potential windstorm claims in nine western European countries between Jan. 1 next year and Jan. 1, 2014, a report from rating agency Standard & Poor’s said.
Insurers and reinsurers use catastrophe bonds to transfer major risks such as storms and earthquakes from their books to capital market investors, freeing up capital to underwrite new insurance business.
Axa priced the floating-rate note on Oct. 25. The Class A notes pay a coupon of 350 basis points over three-month Euribor.
The bond was marketed at a size of 150 million euros, but was upsized due to demand, to 250 million euros at pricing and then to 275 million euros.
“Calypso Capital was well-received as it is one of a limited number of Euro Wind bonds that have come to market, and investors have a strong appetite for transactions that diversify away from pure U.S. wind coverage,” said one broker with knowledge of the transaction.
“The pricing levels look to be more attractive than previous bonds, giving better returns to investors,” said the broker.
Axa chose to use a tri-party repo collateral solution, with BNP Paribas as counterparty and Euroclear as tri-party agent, rather than investing the collateral underpinning the issue in U.S. Treasury Money Market Funds (TMMF), as most cat bonds issued this year have done.
The tri-party repo solution uses Libor or Euribor as its underlying interest rate, which tends to provide higher returns than solutions based on U.S. TMMF.
The catastrophe bond market has revived this year after 12 months of paralysis following the collapse of investment bank Lehman Brothers, a counterparty in several early bond issues.
The transaction used new insurance data aggregator PERILS to determine the industry loss that will trigger a payout to Axa.
The Swiss-based facility is expected to contribute significantly to the growth of the Euro wind bond market, according to market participants.
“For insurance companies, it will lead to a reduced basis risk and is therefore a good basis for future transactions for both counterparts,” Rupert Flatscher, head of Munich Re’s (MUVGn.DE) risk trading unit, told the Thomson Reuters ILS Community.
Aon Benfield (AON.N), the world’s biggest insurance broker, has said it expects to see more than 500 million euros of new European Windstorm transactions placed this year.
Of that total, 375 million euros of European Wind bonds have already closed, in the form of Calypso Capital and Groupama’s 100 million euro GreenValley II, which protects the French insurer against windstorms in France.
Calypso Capital has pushed total 2010 issuance of cat bonds to around $3.147 billion, of about $4-6 billion forecast for the year by market participants.
America Family Mutual Insurance is currently marketing Mariah Re Ltd to investors. The $100 million bond will provide the U.S. mutual insurer with protection against severe thunderstorm in the United States. (Editing by Catherine Evans) (To join the Thomson Reuters Insurance Linked Securities Community for more news and analysis, email firstname.lastname@example.org)