Atlantic & Western Re Limited was set to price a $300 million catastrophe bond private placement last week on the heels of two vicious hurricane seasons that saw eight storms ravage the U.S. Gulf Coast and Florida regions in the past 15 months. The deal marks the sixth issuance this year in the under-the-radar sector.

The deal, led by Goldman Sachs, consists of two, five-year tranches, a $100 million class A tranche, which Fitch Ratings expects to rate BB' and a $200 million class B tranche expected to be rated at the B' level by Fitch. A Goldman Sachs official said the firm could not comment on the deal as it is a private placement, and had yet to price. The deal was expected to price last Friday.

The deal is somewhat unique in that it is exposed to three different natural disaster zones. The A class notes are exposed to European wind storm risk, concentrated in Western Europe, and U.S. and hurricane risk, encompassing the East and Gulf Coasts. The B class notes are exposed to those risks, as well as California earthquake risk.

The notes are backed by premiums on reinsurance policies sold by Bermuda-based PXRE Reinsurance Ltd., which has entered into a five-year reinsurance contract with the issuing entity, A&W, which was formed solely for the purpose of issuing the notes. The contract provides for payments from A&W to PXRE following certain catastrophic events during the risk period. Reflected in the ratings, said Fitch analysts, is the fact that, in the case of extreme events, investors could lose their entire principal investments.

Donald Thorpe, insurance analyst with Fitch, said the structure of the deal is similar to other recent transactions in the sector, but the exposure to European wind storms creates currency risk. The risk is that the euro would strengthen and, if one of the payout events takes place, U.S. bondholders could have to pay as much as $1.40 for every 1.00 lost should PXRE incurs losses in Europe.

The past few years have seen an increase in cat bond issuance, but that growth has not reached the level that Fitch had expected in the post-9/11 environment, said Thorpe. "We have seen an up-tick in cat bond issuance, driven by the growth of the reinsurance business itself," said Thorpe. This year's roster of issuers has included Avalon Re, with a $405 million deal, Cascadia Ltd., with $300 million, Kamp Re, with $190 million in the market, Residential Re, with a $176 million deal, Swiss Re, $300 million, and Vita Capital, with $362 million, to total over $1.7 billion in issuance this year.

Cat bonds are an attractive source of reinsurance because they offer multi-year coverage, as opposed to most standard reinsurance policies that are good for one year. Cat bonds also free companies from having to buy reinsurance from competitors, and carry virtually no risk to the sponsoring entity, in this case PXRE.

(c) 2005 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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