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Strong demand for Allianz's Blue Fin II cat bond

German insurance giant Allianz's Blue Fin II cat bond - which increased in size to $180mn earlier in the month - was over-subscribed at its close last week (14 April).

The US wind and quake bond is managed by Aon Benfield and Goldman Sachs and priced at LIBOR+1350 basis points (bps) - at the mid-point of a targeted 1300-1400bps - with investors' commitments to the transaction signed down, according to sources close to the deal.

Blue Fin II is the second cat bond to upsize on the back of strong investor demand this year and may mark the peak of pricing in the insurance-linked securities (ILS) market, which has seen spreads increase by 50 percent in the past year, according to recent research by broker Guy Carpenter.

A significant number of ILS transactions have matured in recent months - $1.85bn will close between January and end-June 2009 - while secondary trading activity has been calming down, meaning investors have larger cash positions which they are seeking to deploy on new cat bonds.

Market commentators note that increased supply and a dislocation between cat bond spreads and traditional reinsurance pricing should put pressure on capital markets to lower their ILS pricing expectations as the year progresses.

Liberty Mutual's Mystic Re II-2009 increased in size during marketing from $200mn to $225mn in March and, along with Blue Fin II, evinces strong investor demand for natural catastrophe bonds in an unexceptional issuance market ahead of the start of the US wind season in June.

Our sister title Trading Risk understands that global bank HSBC is acting as arranger of the collateral management mechanism on Blue Fin II, which - in a first for the sector - does not have a total return swap (TRS) counter-party.

Instead, the principal proceeds of the transaction will be invested in floating-rate notes issued by AAA-rated German government agency Kreditanstalt für Wiederaufbau (KfW). The notes will have a final maturity of 3.75 years and are puttable quarterly after the first six months.

The Blue Fin II notes - issued by Allianz SE subsidiary Allianz Argos 14 - are the second issuance under the EUR1bn 2007 Cayman Islands-based shelf programme, and the fourth cat bond for the German firm in just two years.

The notes have been allocated preliminary ratings of BB- by Standard & Poor's (S&P) and will provide Allianz with three years of indemnity cover for US wind and quake.

Allianz's Blue Fin II bond follows the successful closure in March of Chubb's $150mn East Lane Re III and Liberty Mutual's expanded Mystic Re II 2009, and of SCOR's Atlas V in February.

The pipeline of deals ahead of the wind season also continues to look healthy, with niche US property insurer Assurant Inc launching its first ILS - the $150mn US wind cat bond Ibis Re - which is expected to close later this month, as first revealed by Trading Risk earlier in April.

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