Pelican Re Ltd. (Series 2013-1)

This is Louisiana Citizens second catastrophe bond, after 2012’s Pelican Re Ltd Series 2012-1 deal.

The Pelican Re 2013-1 deal will seek to extend the hurricane protection that LA Citizens receives from the capital markets via catastrophe bonds.

We understand the deal will seek to issue at least $100m of notes to provide Louisiana Citizens with a new source of capital market backed fully collateralized reinsurance cover. The sale of the notes will collateralize the reinsurance agreement between Pelican Re and LA Citizens, with the reinsurance providing protection from hurricane losses on a per-occurrence basis and using an indemnity UNL trigger. The term of the cat bond cover is over a four year duration.

Coverage will protect LA Citizens from losses within its Coastal and Fair plan books of business. Both the Coastal and Fair plans contain residential and commercial properties, although we understand that the covered business is predominantly residential in nature.

The transaction will use an initial attachment point of $389m of ultimate net loss to the covered business and an initial exhaustion point of $539m we understand. That equates to an initial attachment probability of 2.29% and an initial expected loss of 1.88%. The deal is being marketed with a coupon or interest spread range of 7% to 7.5%.

This puts the cover from the 2013 cat bond above the 2012 layer, which attaches at $200m. That means this new cat bond is less risky than the 2012 deal.

The structure of Pelican Re 2013-1 will allow the sponsor to adjust the reinsurance layer that the deal provides by opting to reset the attachment point. This is effectively a drop down facility, the coverage can be dropped down the reinsurance tower, but at the sponsors request rather than after a triggering event or loss.

Louisiana Citizens will be able to request an ‘optional reset’ at any time after the first risk period is over we’re told which will enable it to lower the attachment point, thus increasing the probability of attachment and expected loss of the notes and also increasing the coupon paid to investors.

The coverage layer can only be moved within pre-defined limits and the transaction has a maximum attachment probability figure of 4.73% which we understand would be at $193m according to the modelling, a maximum expected loss of 3.26% and we’re told also a maximum possible coupon price range of 10% to 10.75%.

AIR Worldwide has modelled a number of historical events against this deal and we understand that three hurricanes were shown to cause a 100% loss to the notes no matter where the layers attachment was set at the time, including Katrina from 2005.

Update: We understand that this cat bond is likely to upsize to $140m before close.

The initial price guidance has been reduced to 6.50% to 7.00% while the maximum price guidance has been reduced to 9.75% to 10.00%.

Update 2: The pricing on this cat bond dropped again before close, finishing with an initial coupon of 6% and a maximum coupon of 9.25%. The size of the deal finished at $140m.