American International Group has issued $400 million of catastrophe bonds through its Tradewynd Re program.
In a press release issued Dec. 19, the insurance group said that the latest transaction provides indemnity reinsurance protection against U.S., Caribbean and Gulf of Mexico named storms, and U.S. and Canadian earthquakes. Similar to Tradewynd Re Ltd.'s July 2013 catastrophe bond, this arrangement includes a diversified portfolio of commercial and consumer risks.
Catastrophe bonds help insurers transfer the risk that they will have to pay a large amount of claims in the event of a natural disaster. If certain triggers are met, the insurer may stop paying interest or even hold on to the principal of the bonds, using these funds to pay claims.
To fund its obligation to AIG, Tradewynd Re Ltd. issued three tranches of notes, one with a one-year term and two with three-year terms. Due to strong investor demand and favorable pricing, AIG increased the offering to $400 million from the initial $100 million.
Pricing was not disclosed; however the deal was completed in advance of the January renewals season for traditional reinsurance. Cat bonds have typically been used to supplement traditional reinsurance, particularly when traditional reinsurance was expensive or hard to obtain. However demand for cat bonds has grown to the extent that this market can drive pricing of traditional reinsurance, rather than the other way around.
The transaction closed Dec. 18, and provides AIG with fully collateralized coverage against losses from such events described above on a per-occurrence basis.
AIG sponsored over $500 million of indemnity cat bonds this year and has sponsored a total of $2.375 billion in total since 2010.