The Cincinnati Insurance Company, a subsidiary of Cincinnati Financial Corporation, has returned to the catastrophe bond market for its second and largest issuance, with a $100m Skyline Re Ltd. (Series 2014-1) arranged by Jardine Lloyd Thompson Capital Markets.
Jardine Lloyd Thompson Capital Markets (JLTCM) Inc., part of reinsurance broker JLT Towers Re, has announced today the completion of this privately placed catastrophe bond transaction. Last year, the former Towers Watson Capital Markets team helped Cincinnati Insurance to issue its first cat bond, with the $61.2m Skyline Re Ltd. (Series 2013-1).
The 2014 Skyline Re cat bond deal sees Cincinnati Insurance returning to the capital markets for an increased source of reinsurance protection. The 2014 Skyline Re cat bond is not just larger in size than the 2013 issuance, it is also Cincinnati’s first multi-year deal, providing it with three years of cover compared to the 1 year Skyline 2013.
So, the Skyline Re 2014-1 cat bond provides Cincinnati Insurance with a three-year source of fully-collateralized reinsurance protection for certain of its earthquake and severe convective storm (thunderstorm, tornado and hail) risks.
The cat bond has been cleverly structured to provide Cincinnati Insurance with per-occurrence protection for its earthquake risks and annual aggregate protection for its severe thunderstorm risks. Skyline Re 2014-1 uses an indemnity trigger, as did the insurer’s 2013 cat bond deal.
The coverage provided by this cat bond is broader than in the Skyline Re 2013 deal. Earthquake coverage is for a larger territorial area, the 2013 deal covered only the New Madrid quake zone, although the 2014 deal does not cover California. The severe convective storm coverage is regional, as was the Skyline 2013 deal, but it provides cover for a larger area in the 2014 issuance.
“Following the recent formation of JLT Towers Re, we were pleased to again collaborate on such an innovative structure with Cincinnati Insurance, a true market leader. The Skyline 2014-1 transaction built upon the success and the same relationships involved in the Skyline 2013-1 transaction. At $100 million, the Skyline 2014-1 bond grew substantially from the $61.2 million 2013 bond. In addition, the transaction expands the coverage territory and provides three-year cover as opposed to the one-year cover in the previous bond. We saw not only strong support from existing investors but also significant interest from new investors,” commented Rick Miller, Managing Director and Co-Head of Insurance-Linked Securities at Jardine Lloyd Thompson Capital Markets.
“This second Skyline transaction clearly shows the value for cedants to begin to engage with the capital markets and develop relationships with these new business partners. The collaborative process between cedant and investor in a private catastrophe bond builds relationships between them for the long term. The growth in overall investor support for our private placement bonds clearly demonstrates that these types of cat bonds have become broadly accepted and mainstream,” added Michael Popkin, Managing Director and Co-Head of Insurance-Linked Securities at Jardine Lloyd Thompson Capital Markets.
According to JLTCM the $100m of cover offered by the issuance of Skyline Re 2014-1 was secured at the tight end of revised price guidance, as strong investor demand helped Cincinnati Insurance secure attractive pricing for this layer of its reinsurance program.
The transaction was launched with initial price guidance of 15% to 16%. This was revised as investor demand for the transaction built up and was reduced to 14% to 15%. Final pricing for the notes was a coupon of 14%, right at the bottom end of the reduced range. That’s effectively a 10% decline in transaction pricing from the middle of the launch guidance range.
Investors were keen to access the transaction, Artemis understand, which helped the pricing to be reduced and also enabled the sponsor, Cincinnati Insurance, to benefit from broader coverage than its 2013 transaction at more attractive pricing. Demand for the notes was so strong that the deal could have been larger but as it only covers a $100m layer of the reinsurance program there was no room left to upsize it.
The investor base for Skyline Re 2014-1 is broader than the deal a year earlier, demonstrating demand and investor acceptance of these privately placed, efficient ILS transactions.
Rick Miller told Artemis; “We have a deep and broad following of investors for this and the other deals we have been doing. The investor interest has definitely grown. Given the amount of investor interest we had for this deal, it is clear that we could do a much larger private placement cat bond for the right transaction.”
That will be particularly attractive as cedants become ever more aware of the competition between traditional reinsurance and alternative solutions such as ILS and catastrophe bonds. This is the largest privately placed cat bond transaction Artemis has seen and as such it sends a signal that this is a real option for cedants seeking larger amounts of coverage.
Miller continued; “With few exceptions, it is hard to see why a cedant would want to pay the substantially extra frictional costs to do a 144A when they are able to access such as strong group of ILS partners through a private placement cat bond.”
The risk modelling for this transaction was undertaken by the investors. The investors are provided with a considerable amount of information, these transaction are not really light on documentation and supporting materials despite them often being referred to as cat bond lites, to allow them to do this.
Michael Popkin explained; “The documentation for our bonds is anything but light. The reinsurance agreement and the associated bond documents are extremely robust. They are simply light on bond building costs, which make them more attractive to cedants who would otherwise not come to the capital markets. By driving down the frictional costs, we have been able to provide a way for our cedants and the investors to commence a long term relationship as well as providing those investors in our deals with access to cedants and perils that would be hard to access otherwise.”
The JLT Capital Markets team told Artemis that since they have now structured and arranged a number of privately placed cat bonds, they and the various service partners in the deals have become very efficient, enabling the transaction costs to be kept to a minimum.
JLT Capital Markets acted as both structuring agent and bookrunner for this transaction.
The Skyline Re 2014-1 cat bond transaction officially closed on the 23rd January.
It is encouraging for the cat bond and ILS market as a whole to see the successful issuance of large privately placed cat bonds. It is also encouraging to see that the ex-Towers Watson Capital Markets team have continued to pursue this specialism in their new home at JLT Re.
Michael Popkin said; “Being part of the JLT platform gives us access to a much larger global entity than we had before. This will present us with the opportunity to access other risks and a broader geography of cedants that will enable JLT Capital Markets to continue to bring interesting and diversifying transactions to the ILS markets.”
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