The latest catastrophe bond from U.S. specialty insurer Assurant has now received its preliminary rating and a pre-sale report has been published, which means we have more information on the transaction to share. Ibis Re II Ltd. (Series 2013-1) is Assurant’s fourth cat bond to be issued under an Ibis Re named vehicle.
Ibis Re II sees Assurant looking for a source of multi-year, fully-collateralized U.S. hurricane reinsurance protection for certain named subsidiary companies. The named subsidiaries, which are the actual cedents to this deal, are American Security Insurance Co., American Bankers Insurance Co. of FL, Standard Guaranty Insurance Co., and Voyager Indemnity Insurance Co.
The transaction will see Ibis Re II issued three Series 2013-1 tranches of cat bond notes, each offering hurricane protection at different levels within the reinsurance tower. The deal has a preliminary size of $175m, although that could well grow, and all three tranches are exposed to the same U.S. hurricane risk, across the main U.S. wind exposed states and also Puerto Rico.
The covered area includes; Alabama, Arkansas, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Mississippi, Missouri, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Vermont, Virginia, West Virginia, the District of Columbia, and Puerto Rico.
The Class A tranche of notes have an initial size of $100m, an attachment probability of 0.79%, an expected loss of 0.73% and an exhaustion probability of 0.65% and are the least risky notes. The Class B notes are currently $35m in size, have an attachment probability of 2.02%, an expected loss of 1.35% and an exhaustion point of 0.88%. The Class C notes are riskiest, currently sized at $40m, have an attachment probability of 4.12%, an expected loss of 2.98% and an exhaustion point of 2.04%.
All three tranches of notes will be sold to collateralized an index-based risk transfer via reinsurance agreement to provide protection on a per-occurrence basis over a 3-year risk period to the ceding insurers against hurricane in the covered area. All three tranches will use the Verisk Catastrophe Index as the trigger, meaning that the trigger will be a county-weighted industry loss index.
At the currently marketed tranche sizes, the class A notes will cover 50% of losses between an initial attachment point of $1.86 billion and an initial exhaustion point of $2.06 billion. The class B notes cover 5% of losses between an initial attachment point of $1.06 billion and an initial exhaustion point of $1.76 billion, and the class C notes cover 10% of losses between an initial attachment point of $660 million and an initial exhaustion point of $1.06 billion.
The Class A notes are being marketed with a coupon guidance interest spread of 3.5% to 4%, the Class B notes are being offered with an interest range of 4.5% to 5.25% and the Class C notes are offering a spread of 8% to 8.75%. We expect to see a modicum of tightening on these as pricing is finalised, however they do look reasonable given the risk profile and current market appetite.
Those percentages of each layer that each tranche will cover could change as the size of each tranche is finalised. Given the small size of tranches B and C, which may prove popular as they offer a higher interest spread due to the higher risk, there is a strong likelihood that this deal will upsize.
In the transactions pre-sale report, rating agency Standard & Poor’s notes a few points worth mentioning. It notes that since the 2012 Ibis Re cat bond, the contribution to expected losses from Puerto Rico hurricane risks has increased, likely due to Assurant having increased business in the country.
Risk modelling of historical hurricanes showed that no known storms would have reached the attachment point for the Class A, least risky notes. For the Class B Notes, the 1926 “no-name” hurricane (which made landfall in Florida and Alabama) and 1992’s Hurricane Andrew would have generated principal losses of 100% and 13% respectively on the Class B tranche of notes. The Class C notes would have been affected by those two storms and also the 1928 “no-name” Florida hurricane, with the three events causing principal losses of 100%, 100% and 60% respectively.
While the contribution from Puerto Rico to expected losses has risen over the 2012 Ibis Re cat bond, it is still very low compared to Florida which is where much of the risk from this cat bond lies. Puerto Rico contributes only 5.5% for the Class A notes, 9% for the Class B notes, and 10.1% for Class C notes, to expected losses, whereas the contribution to expected loss from Florida is 80.4% (class A), 75.0% (class B), and 66.9% (class C).
Collateral from the sale of the Ibis Re II notes will be deposited in a reinsurance trust account, for each class of notes, and invested in one or more Treasury money-market funds. The collateral and trust accounts will be managed by Deutsche Bank Trust Co. Americas.
At the annual reset there are limitations to how much the risk profile of the deal can change with respect to expected losses in different U.S. states. The modeled contribution to expected losses for Florida will not be less than 65% for the Class A notes, 60% for the Class B notes, and 50% for the Class C notes.
Standard & Poor’s said that it assigned preliminary ratings of ‘BB+(sf)’, ‘BB-(sf)’, and ‘B(sf)’ to the Series 2013-1 Class A, B, and C notes, respectively.
That’s all we have for now on the Ibis Re II Ltd. (Series 2013-1) catastrophe bond. This deal has now been marketing for a week so we expect to hear of any price tightening or increase in size within the next few days and will update you. All of the information on this cat bond has been added to our Deal Directory.
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