German reinsurer Hannover Re has successfully placed a US$150 million catastrophe bond that will protect it against windstorms in northern Europe. The bond was issued to investors by Eurus, a Cayman Islands-based special purpose vehicle.
Hannover launched the bond in response to the high retrocession rates the market has experienced since last year’s U.S. hurricane season. “With prices so high it makes sense for Hannover to look for alternatives,” says Gabriele Handrick, spokeswoman for the reinsurer. “This was a good opportunity because it is efficient and cheaper than normal retro cover.”
The Eurus bond has a parametric trigger. It pays out when a windstorm reaches a windspeed equivalent to that of a one-in-50-year event. The risk of loss to the bond’s investors has been modelled by risk modelling firm Eqecat.
Eurus offers Hannover Re immediate protection against windstorms in seven countries – Belgium, Denmark, France, Germany, Ireland, the Netherlands and the U.K. – for a 32 month period, covering three windstorm seasons. Rating agency Standard & Poor’s has rated the bond double-B. Investment bank BNP Paribas is acting as intermediary between the special purpose vehicle and investors. BNP and Lehman Brothers acted as joint lead managers and bookrunners on the bond issue.
Investors welcomed the bond because it covers European as opposed to U.S. wind risk. “Most investors don’t only want U.S. wind, they want a diverse portfolio,” says one investor, who asked not to be named. “This bond acts as a nice little diversifier.”
Investors also liked the bond’s coupon. The bond pays investors a return of 625 basis points over three-month Libor. “It was oversubscribed; the market has spoken,” says the investor.
The Eurus deal is the first time Hannover Re has used what it describes as a traditional catastrophe bond – one that uses a parametric trigger. The company has been passing catastrophe risks to the capital markets since 1994 with its so-called K deals, but these have used a variety of different triggers. Some, for example, have used indemnity triggers, which means the amount they pay out is based on the exact losses Hannover Re suffers from an event. Hannover launched K5, the latest in the series, on February 3 this year.