Argo Re sells $100 mln in insurance linked notes

New catastrophe bond sponsor Argo Re closed its first transaction on Friday, selling $100 million of risk exposure to insured losses from global natural disaster to capital market investors.

Argo Re, a unit of Argo Group International Holdings (AGII.O) closed the class A notes under its Loma Reinsurance Ltd special purpose vehicle, a source familiar with the transaction told Reuters.

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 secondary event happens.

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.

The Cayman Islands-based Loma Reinsurance Series 2011-1 class A notes have been given a BB- rating by Standard & Poors. The bond closed at its original asking price of $100 million, while pricing was increased from the original guidance, coming in at 950 basis points over three-month Libor.

To trigger a payout to Argo Re, a U.S. hurricane or earthquake, or a Japan tremor would have to cause $30 billion in losses, while a European wind event would have to generate $10 billion in losses.

During the duration of the bond, the transaction will cover two wind seasons in the U.S., plus constant exposure to U.S. earthquake, Japan quake and Euro wind risks.

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 will underwrite the transaction, and act as guarantor for the repurchase party.

Issuance activity has slowed in the cat bond market since the launch of catastrophe risk modeling firm RMS's new U.S. hurricane model.

The software revisions by the RMS have increased loss estimations by an average of 90 percent under the Version 11 model for outstanding exposed cat bonds and Insurance Linked Securities transactions.

Investor appetite in cat bond transactions has dampened as sponsors and investors alike adapt to the RMS model changes, ILS market participants say.

Issuance volume currently stands at $1.75 billion for the year.

(Editing by Ron Askew)