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Derivatives

Goldman Sachs Structures USD160 Million CAT Bond

Goldman Sachs is structuring a USD160 million catastrophe bond for Paris-based reinsurance company SCOR Group to securitize Californian and Japanese earthquake risk and European windstorm risk, according to a cat bond analyst in New York. Officials at Goldman Sachs and SCOR declined comment. The analyst expects the deal to hit the market by early next year and is likely to be split into two three-year tranches. It is still too early to determine pricing or how the tranches will be divided.

The deal will be linked to a parametric measure, which is based on the magnitude and location of an earthquake or windstorm. A parametric measure is different from an index-based or indemnity-based deal, which are linked to industry-wide or specific loses.

Christian Dinesen, director at Standard & Poor's financial services ratings in London, said, "we are seeing more focus on these, but no more action." He thinks the decision on whether to chose CAT bonds over traditional reinsurance will be taken when the premium rates for next year's reinsurance are available, which he expects to be in the next couple of weeks.

SCOR did a similar deal in March 2000, issuing a USD200 million cat bond to protect it from excessive loses resulting from European windstorms, U.S. hurricane and U.S. and Japanese earthquake damage. Goldman Sachs structured that deal as well and it was sold through Atlas Re, an offshore special-purpose reinsurance vehicle. Analysts predicted SCOR may look to tap Atlas Re again to sell this issue. Last year's bond has three tranches, a USD70 million class A tranche with a coupon of LIBOR plus 250-290 basis points, a USD30 million class B tranche with a coupon of LIBOR plus 365-415bps and a USD100 million tranche with a coupon of LIBOR plus 1300-1400bps.

SCOR has gross written premiums of EUR3.5 billion (USD3.1 billion).

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