Armor Re catastrophe bond rated by S&P, more details emerge

The Armor Re Ltd. (Series 2013-1) catastrophe bond, which we wrote about when it launched earlier this week here, has now received its preliminary rating from Standard & Poor’s and so more detail on the transaction is now available to us. The Armor Re deal sees a first-time cat bond sponsor, American Coastal Insurance Company, looking to tap the capital markets for a portion of its reinsurance coverage for the first time.

Armor Re Ltd. is a Bermuda domiciled special purpose vehicle, registered on the 3rd of April 2013, according to the public register. It has been registered for the purpose of issuing series of catastrophe bond notes, of which this Series 2013-1 issuance is the first.

With this first series of notes the deal is expected to be a minimum of $125m in size, but according to market sources is widely expected to grow to $200m as the sponsor would ideally like to achieve that much cover from the deal and the pre-sale report from S&P shows the notes covering a $200m layer of the sponsors reinsurance tower.

So with this cat bond note issuance via a reinsurance agreement with Armor Re Ltd., American Coastal Insurance is seeking to secure a source of fully-collateralized reinsurance protection using an indemnity trigger for a one-year risk period. The risk period is expected to run from the 1st June until the end of May 2014. Coverage is for named Florida wind storms, so tropical storms and hurricanes given names by the National Hurricane Center.

The layer of protection provided by Armor Re Ltd. sits above American Coastal Insurance’s reinsurance tower and some cover from the Florida Hurricane Catastrophe Facility. These reinsurance layers are inured to the layer that Armor Re covers, we understand, but the reinsurance layers do not have reinstatement provisions meaning that they can be eroded by storms. It appears that depending on whether the sponsor chooses to replace an eroded layer of non-reinstating reinsurance, the attachment point for the Armor Re cat bond could effectively be lowered as the reinsurance layers beneath were removed by losses from storms which failed to reach the cat bond attachment point.

The notes cover losses between an initial attachment point of $913m ($75m net of reinsurance as there is a $75m layer of retention at the foot of the reinsurance tower) and the exhaustion point of $1.113 billion ($275m net of reinsurance). The initial probability of attachment is 0.42%, initial expected loss is 0.34% and the initial probability of exhaustion is 0.3%.

The graphic below shows the make-up of American Coastal Insurance’s reinsurance tower with the new $200m layer of cover provided by the Armor Re Ltd. cat bond at the top.

American Coastal Insurance reinsurance tower including Armor Re Ltd. catastrophe bond

Risk modeller AIR Worldwide performed a historical loss analysis and found that there had not been any individual events or indeed years which would have seen losses reach the attachment point and trigger a loss to noteholders.

The storms that caused the greatest estimate of gross losses, including loss adjustment expense, were the no-name storm of 1928 in Florida causing estimated losses of $291m; the no-name storm of 1926 that impacted Florida and Alabama causing estimated losses of $270.4m; and the no-name storm of 1947 affecting Florida and Louisiana and causing estimated losses of $268m. Those three years are the years with the highest total losses on a modelled basis, no other years with multiple qualifying storms reached the level of losses seen in 1947, according to S&P’s report.

In terms of contribution to expected loss, the majority of the risk is with apartments and condominiums, primarily of masonry construction. Palm Beach, Pinellas, Collier, Sarasota and Lee counties in Florida are the top five counties in terms of expected loss.

Proceeds from the sale of the cat bond notes will be held in a collateral account and invested in U.S. treasury money-market funds which are highly rated. Bank Of New York Mellon are acting as indenture trustee and reinsurance account trustee.

The notes will pay investors a coupon above the return of the money-market funds and are being marketed with a price guidance of 4.75% to 5.5%.

Standard & Poor’s Ratings Services assigned a ‘BB+(sf)’ preliminary rating to the Series 2013-1 catastrophe bond notes to be issued by Armor Re Ltd.

S&P notes that credit risk for this deal is mitigated as American Coastal will prepay the quarterly insurance premium for the entire risk period at the deals closing. S&P also notes that if there is a potential covered event, American Coastal will pay servicer fees in advance. These are important points for investors and will help make investors more comfortable with the deal from a new cat bond sponsor.

So that is all the key details we have on the Armor Re Ltd. (Series 2013-1) catastrophe bond. We will update you on the size and pricing as the deal progresses to market and will be updating our Deal Directory entry as new information becomes available.