A new catastrophe bond has been launched for first time cat bond ceding firm Security First Insurance Company, as it seeks a capital market backed source of collateralised reinsurance cover through a $100m First Coast Re Ltd. (Series 2016-1) cat bond issue.
It’s the first transaction to come to market featuring Security First Insurance, however we understand that in this case it is via reinsurance firm Swiss Re, which is acting as the ceding reinsurer, with Security First as the reinsured.
Security First Insurance is a Floridian primary property insurance company founded in 2005. It underwrites homeowners, rental and condominium insurance and has also participated in the Florida Citizens depopulation program.
For this catastrophe bond recently registered Bermuda special purpose insurer First Coast Re Ltd. will seek to issue and sell to investors a single tranche of Series 2016-1 Class A notes, which have a preliminary size of $100m.
The notes will collateralise a retrocessional reinsurance agreement with Swiss Re, while Swiss Re will enter into a reinsurance agreement with Security First Insurance so passing on the capital markets coverage to the insurer.
The First Coast Re 2016-1 cat bond notes will cover losses from Florida named storms and severe thunderstorms. The coverage is for Swiss Re, but is ultimately based on the indemnity experience of Security First, we understand.
The First Coast Re Class A notes provide their protection on a per-occurrence basis, using an indemnity trigger based on Security First’s loss experience, providing reinsurance across a three-year term.
The First Coast Re 2016-1 cat bond notes will sit at the top of Security First Insurance’s reinsurance tower, but we’re told they feature a top and drop structure, so as catastrophe losses affected the insurers reinsurance provisions the cat bond attachment would drop down to replace any eroded reinsurance layers.
So, given the top and drop structure of this First Coast Re cat bond, it effectively means the notes have an attachment point that will change after the insurer is hit by catastrophe events, even if those events do not hit the cat bond itself.
The single tranche of Series 2016-1 Class A notes that will be issued by First Coast Re Ltd. initially cover a layer of risk in Security First’s reinsurance tower above $1.112 billion of losses, but are said to attach at $5m for the first two events, $2m of the next two and $0 for subsequent events. But those figures really represent retention on the covered layer reducing as it drops down, it appears.
The notes have an attachment probability of 1.2% and an expected loss of 1.15%. We understand that they are being offered to ILS investors with price guidance of 4.25% to 4.75%, which would reflect a reasonably high multiple of at least 3.7 times the base expected loss. The high multiple likely reflects the top and drop structure, as the attachment probability will effectively be higher as the cat bond notes dropped down.
So this catastrophe bond will ultimately provide Security First Insurance with a multi-year source of fully collateralised reinsurance backed by capital market investors, that will help to ensure the insurer has cover in the event of multiple events striking the company during a single annual risk period.
As layers of the insurers reinsurance erode from cat events, including its FHCF coverage, the cat bond will drop down to ensure no gaps are left in the remaining reinsurance coverage.
It’s a good structure for a primary insurer which has significant exposure to any tropical storms or hurricanes that hit Florida and covering severe thunderstorm risk as well means that the two major natural perils that threaten Security First are both better protected against.
We’re told that Swiss Re Capital Markets and GC Securities are both acting as joint structuring agents and bookrunners for this First Coast Re cat bond, while AIR Worldwide is providing risk modelling services.
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