LONDON, June 8 (Reuters) - Bermuda-based reinsurer Argo Re has started to market its first catastrophe bond, to cover itself against losses from natural disasters worldwide, credit rating agency Standard & Poor’s said on Wednesday.
S&P said Argo Re, a unit of Argo Group International Holdings AGII.O, is preparing to sell an as-yet undisclosed amount in class A notes under its Loma Reinsurance Ltd special purpose vehicle.
The bond will cover second and subsequent event losses from hurricanes and earthquakes in the United States, windstorms in Europe and earthquakes in Japan. That means it will not be activated until a large qualifying event has already occurred.
Three second-and-subsequent catastrophe bonds have been activated by March 11’s devastating earthquake in Japan. Investors have yet to lose any money on the bonds, but would make a loss if another qualifying event occurs. [ID:nLDE7511PN]
Catastrophe bonds are used by insurers and reinsurers to transfer extreme risks to capital markets investors, rather than the traditional reinsurance market, thereby freeing up capital for underwriting. Reinsurers and brokers expect new sales of the collateralised debt instruments to reach $6 billion in 2011.
The Cayman Islands-based Loma Reinsurance Series 2011-1 class A notes have been assigned a BB- rating by S&P, which said the 18-month class A notes would be collateralised with three-month U.S. debt.
Risk modelling for all covered peril loss estimates for U.S. hurricane and Japan earthquake events will be based on models by AIR Worldwide, while the modelling for windstorm in Europe will be based on the Industry Exposure Database of Swiss-based loss and exposure aggregator PERILS.
Goldman Sachs (GS.N) will underwrite the transaction, and act as guarantor for the repurchase party. Argo Re will pay each quarterly premium in advance to Goldman Sachs, according to S&P.
"A failure to pay a premium would be an event of default and the notes would no longer be "on risk" and the transaction would unwind prior to the start of the accrual period related to the missed payment," said S&P. (Editing by Catherine Evans) -- For more details on cat bond transactions, see the Thomson Reuters Insurance Linked Securities Community, click here