Louisiana Citizens Property Insurance Corporation, the coastal windstorm insurer of last resort in the state of Louisiana, has successfully secured itself a flexible, fully-collateralized layer of reinsurance protection through its second trip to the capital markets as a catastrophe bond sponsor with its Pelican Re Ltd. Series 2013-1 cat bond. The Pelican 2013 cat bond has now completed and has been listed on the Cayman Islands Stock Exchange.
Louisiana Citizens visit to the cat bond market in 2013 has been largely driven by a hunt for value and price in its reinsurance renewal for the year. Back in March we reported that the insurer would consider another cat bond, to add to its Pelican Re 2012 deal if it could secure a saving by accessing third-party capital via a securitization.
The Pelican re 2013-1 cat bond was launched in April and hit the market as a $100m single tranche of risk exposed to Louisiana hurricane risk offering investors a risk premium in a range of 7% to 7.5%.
The 2013 Pelican Re cat bond offers Louisiana Citizens a degree more flexibility than its 2012 deal as the structure features a novel on-request drop-down, allowing the sponsor to adjust the reinsurance layer provided by this cat bond by opting to reset the attachment point. This means that the coverage can be dropped down the reinsurance tower at the sponsors request, allowing the coverage of this cat bond to be moved up or down its reinsurance program tower, adjusting the important factors of attachment, exhaustion and as a result the coupon interest paid to investors.
The addition of this drop-down feature to the coverage provides Louisiana Citizens with a degree of fall-back should it begin to have reinsurance layers in its tower eroded by storms. It means that if reinsurance layers are degraded which it cannot reinstate due to cost or a lack of reinstatement clauses, it can opt to replace the lower down layers with the capital markets backed cat bond cover and investors are paid an increased coupon for the increased degree of risk.
Before the Pelican Re 2013-1 cat bond completed it saw strong demand from investors enabling the deal to upsize and the pricing to drop not once, but twice before close. Eventually the deal settled at $140m in size and with pricing of 6% at the initial pricing level with a maximum coupon after drop-down of 9.25%.
So with this latest cat bond, Pelican Re Ltd. 2013-1, Louisiana Citizens managed to increase the size of the deal by 40% and the pricing dropped by between 17% and 20%, depending on whether you take the mid-point of the original initial coupon range or the top end, before it closed.
To see how cheap this 2013 cat bond was compared to the 2012 deal we can compare the maximum attachment point coupon price of this deal to last years. In the 2013 cat bond if the drop-down is activated the attachment point moves to around $193m of indemnity loss to Louisiana Citizens and the coupon would then be 9.25%. Compare this to its Pelican Re Ltd. Series 2012-1 cat bond issued last year, which attaches at $200m and pays a coupon of 13.75% to investors and you can see that this deal appears to be approximately 4.5% cheaper or has saved Louisiana Citizens about 48% on an investor coupon basis.
With this large a saving, and the added flexibility that the latest cat bond offers, it’s clear why Louisiana Citizens chose to tap the cat bond market again this year. It has secured much cheaper cover that more closely fits its needs at a time in advance of the traditional reinsurance renewals when pricing may have been uncertain as to what level it could have achieved.
The $140m Pelican Re Ltd. Series 2013-1 cat bond notes were not rated. The Series 2013-1 Class A principal at-risk variable rate notes due May 15, 2017 have been admitted for listing under the Pelican Re Ltd. variable rate note program on the Cayman Islands Stock Exchange.
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