Bonanza Re: The lowest relative price in cat bond market history

by Artemis on December 8, 2016

The recently completed $200 million Bonanza Re Ltd. (Series 2016-1) catastrophe bond, which secured sponsor American Strategic Insurance Group a slice of named storm and severe thunderstorm reinsurance protection, saw the lowest relative price in the history of ILS for a deal with significant Florida exposure.

The Bonanza Re cat bond secured American Strategic $200 million of fully collateralised reinsurance protection against losses from U.S. named storm and severe thunderstorm risks, on an indemnity trigger and per-occurrence basis.

Willis Capital Markets & Advisory (WCMA), the capital markets and ILS unit of the insurance and reinsurance broking arm of Willis Towers Watson, was the sole structuring agent and bookrunner for the Bonanza Re cat bond and said in a client communication that the pricing achieved is the lowest ever, by any measure according to Artemis’ sources.

At issuance, the pricing on both of the tranches of notes issued by Bonanza Re had declined to the bottom end of an already reduced coupon guidance, reflecting strong demand from the ILS investor base.

That demand was so strong, WCMA says, that the Bonanza Re catastrophe bond represents the lowest relative price in the history of the insurance-linked securities (ILS) market for a cat bond deal with a large amount of exposure to Florida, over 70% of expected loss for both covered perils.

Of course that is testament to the very high levels of investor demand right now, with catastrophe bond issuance slower than the last two years and the focus on collateralised reinsurance still growing.

There are still plenty of pure cat bond funds who need something to invest in, as well as many large institutional investors that would rather have a cat bond, with some secondary liquidity, than an illiquid ILS transaction such as collateralised reinsurance.

This demand is helping to reduce pricing even further in the catastrophe bond market and it looks like Bonanza Re, by WCMA’s measure, has seen pricing driven down to a new record low.

That makes this a really attractive time to launch a new catastrophe bond and we’d hope all reinsurance brokers are telling their clients that the ILS market can offer rates equivalent to, and in some cases more efficient than, traditional reinsurance capacity.

Not only was the execution of the Bonanza Re cat bond effective, in securing the cover at an attractive price, but the structure is also effective in protecting a growing insurer like American Strategic.

The $150m of Class A notes provides protection against the most impactful catastrophe events, sitting at the top of the insurers reinsurance tower, with a drop down feature meaning this layer can replace traditional coverage if it is eroded after a first loss event.

The $50m Class B tranche works alongside the insurers retention layer, with an ability to step in to reduce American Strategic’s retention if two events had already hit the firm to a maximum retention level in each case.

That’s really smart coverage for an insurer that has significant and growing exposure in Florida and across an expanding area of the U.S., particularly as severe thunderstorm risks are becoming increasingly impactful to insurers and hitting reinsurance layers.

At the same time Bonanza Re provides the kind of protection the insurer needs from major hurricanes as well, so the dual focused protection is very effective and shows the ability of the ILS market to structure and provide complex risk transfer solutions.

Of course providing those solutions at record low prices bodes well for more deals coming to the ILS market in future. But it perhaps does not bode so well for those who felt reinsurance pricing might level off in 2017, as it reflects some room for rates to continue their downward trajectory.

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