Bonanza Re Ltd. (Series 2016-1)

This new Bonanza Re Ltd. (Series 2016-1) cat bond sees American Strategic looking for per-occurrence coverage, when the Gator Re cat bond was structured on an annual aggregate basis and covering the kind of frequency risk most suitable to such deals.

With Bonanza Re 2016-1, the insurer is seeking to secure a targeted $200 million of fully collateralised reinsurance coverage using a top and drop indemnity structure, to provide reinsurance protection against major catastrophe events that could impact the firm. The term of the coverage would be two and a half years, running from June 2017 to the end of December 2019.

Two classes of notes are on offer. A Series 2016-1 Class A tranche being marketed under the Bonanza Re Ltd. special purpose insurer seeks $150 million of investor capital to provide American Strategic with coverage against both U.S. named storm, for all tropical storm and hurricane exposed states, and severe thunderstorm risk for the 48 continental states and the District of Columbia.

Meanwhile a $50 million Series 2016-1 Class B tranche of notes seeks purely U.S. named storm coverage, for the same covered area as Class A, but are a riskier tranche of notes with a higher attachment probability.

The $150m of Class A notes, which cover both U.S. named storm and thunderstorm risks, have an attachment probability of 2.22%, attaching at $50m of qualifying indemnity losses and exhausting at $150m, and an expected loss of 1.52%, we understand. This tranche is being offered to investors with price guidance of between 4% and 5%.

The $50m Class B U.S. named storm only tranche are riskier with an attachment probability of 4.08%, attaching at $25m and exhausting at $75m, and an expected loss of 2.19%, while the price guidance for this set of notes is between 5.5% and 6%.

With both tranches offered as indemnity per-occurrence, with a top and drop feature, this moves away from the Gator Re deal which was aggregate in nature and so exposed investors to attritional severe thunderstorm risks such as hail events.

This Bonanza Re cat bond covers more severe catastrophe events, meaning that it would take more meaningful single event impacts to American Strategic and its subsidiaries for any investor to face a loss.

While this cat bond is set to be issued in December the risk period only begins in June 2017, so enabling American Strategic to secure a core piece of its catastrophe reinsurance program in advance from the capital markets and take advantage of investor appetite.

Update 1:

Coupon price guidance for the $200 million Bonanza Re Ltd. (Series 2016-1) catastrophe bond issuance, that is being marketed to investors on behalf of sponsor and ceding insurer American Strategic Insurance Group, has dropped to below the initial range once again reflecting strong investor demand.

The Class A notes were being offered to investors with price guidance of between 4% and 5%, but this tranche has had its price guidance updated and lowered, with the notes now offered to investors with coupon guidance of 3.75% to 4%, we understand.

The $50m Class B tranche of notes had price guidance at launch of between 5.5% and 6%, but this tranche has had its coupon guidance lowered as well, with the Class B Bonanza Re notes now offered to investors with guidance of 5% to 5.5%.

Update 2:

The Class A notes priced at 3.75%, the bottom of the already reduced coupon range. With a 2.22% attachment probability and an expected loss of 1.52%, this Class A tranche will offer investors a multiple of 2.5 times the expected loss.

The Class B tranche were priced with a coupon of 5%, again at the bottom of the reduced range. With an attachment probability of 4.08% and an expected loss of 2.19%, this tranche will offer investors a multiple of almost 2.3 times the expected loss.