Towers Watson brings $60m Sullivan Re cat bond to market for new sponsor

Towers Watson Capital Markets (TWCM), the capital markets and private catastrophe bond specialist arm of professional services firm, has bought another new sponsor to the catastrophe bond market with the completion of a $60m cat bond, Sullivan Re Ltd. (Series 2013-1).

TWCM announced today that it has arranged a private placement cat bond for a first-time sponsor and entrant to the insurance-linked securities market, the New Jersey Manufacturers Insurance Group (NJM).

Sullivan Re Ltd. Is a Bermuda domiciled special purpose insurer, registered in early July, for the purpose of issuing series of catastrophe bond notes for NJM. This first Class A tranche of Series 2013-1 cat bond notes issued by Sullivan Re came to market in July and will count towards Q3 2013 issuance figures.

The Sullivan Re cat bond provides NJM with a three-year, fully-collateralized source of reinsurance protection for a single layer of its reinsurance program. The cover provided by Sullivan Re is on a per-occurrence basis and the cat bond is structured using an indemnity trigger, linked to NJM’s losses in New Jersey and Pennsylvania.

“Following NJM’s 100th anniversary earlier this year, we are pleased to bring its first ILS transaction to the market,” commented Ed Hochberg, president, TWCM. “Sullivan Re will supplement NJM’s risk management to help ensure that the company continues to satisfy its obligations to its policyholders for years to come.”

The Sullivan Re cat bond provides New Jersey Manufacturers with protection for losses caused by physical damage resulting from named storms to certain New Jersey and Pennsylvania personal line homeowners and auto insurance portfolios.

Michael Popkin, TWCM’s co-head of ILS commented; “The transaction follows the form of NJM’s traditional reinsurance layer almost to the letter. The Sullivan Re structure was created so that it would complement the rest of the cedants reinsurance tower in close cooperation with Towers Watson’s reinsurance brokerage team.”

“As a three-year deal, the cat bond provides the cedant with an added dimension to its overall program. By working closely with our brokerage colleagues we are able to bring the most comprehensive solutions in the markets to our cedants,” said Rick Miller, TWCM’s co-head of ILS.

“The ILS market continues to transform traditional reinsurance while becoming more accessible to smaller players,” added Michael Popkin. “This is creating a market trend we expect to continue, where new cedants are eager to develop instruments that investors want to participate in. We’re very pleased our team can fill this important role for new cedants by bringing their perils to the ILS market.”

The notes issued by Sullivan Re will not be listed on any stock exchange, but that doesn’t prevent them being actively, and widely traded in the secondary cat bond market. TWCM told Artemis that as with their other privately placed cat bond transactions, such as Oak Leaf Re, Sunshine Re and Skyline Re, the issued notes can be traded through TWCM itself or any other secondary cat bond brokerage.

The Sullivan Re transaction uses U.S. Treasuries for collateral, as is typical of the majority of cat bonds. The transaction priced at 3.75% above the return of the U.S. Treasuries, a slight reduction from the initial pricing guidance demonstrating the demand shown for the transaction by investors.

We asked the TWCM team how the Sullivan Re transaction was received by the market.

Rick Miller said; “The transaction was very well received in the market and as a result the pricing dropped from the initial guidance level.”

Ed Hochberg added; “The subscription process for this transaction had to be managed very carefully as the transaction received so much demand.”

Miller added; “The marketing of these smaller, privately placed cat bonds can be a delicate process as the sponsors do not need the capacity to upsize it endlessly. Investors who show strong and confirmed interest early on in the transactions marketing tend to be the ones who are well subscribed.”

Michael Popkin also added; “We had great feedback from investors who were excited about another new cedant entering the marketplace, its book of business and NJM’s overall position in the market.”

The Sullivan Re cat bond has been placed with a broad mix of global investors, both large and small and with differing strategies, according to TWCM. The investors self-modelled the risks of the transaction, meaning that no risk modelling costs for the transaction are passed on to the sponsor, helping to further reduce frictional costs on issuance.

Michael Popkin commented; “The global mix of investors from across the ILS investor market had a mix of sizes and strategies. We feel this creates a good mix for the cedant’s book and as a result improves the overall liquidity of the deal.”

Towers Watson Capital Markets is increasing its prevalence in this niche area of the catastrophe bond market, where smaller, bespoke and privately-placed transactions allow sponsors to access capital markets protection at reasonable terms no matter what their size.

Rick Miller told us; “With the success of our recent privately-placed cat bond transactions we feel like we’ve hit upon a really neat sweet spot in the market, both for our clients and Towers Watson.”

Ed Hochberg added; “We’ve now got the process of issuing these private deals honed to a level where we can reduce the frictional costs of cat bond issuance so that it becomes really competitive with traditional reinsurance, even for smaller issuances.”

Michael Popkin noted; “With these deals we’re bringing diversification to the market, not just in terms of different underlying books of business but also in terms of the cedant’s position in the insurance and reinsurance markets. Investors value that.”

So far this year TWCM has been responsible for arranging, structuring and bookrunning the Skyline Re Ltd. (Series 2013-1), Sunshine Re Ltd. (Series 2013-1), Oak Leaf Re Ltd. (Series 2013-1) and now Sullivan Re Ltd. (Series 2013-1). Skyline Re, Sunshine Re and Sullivan Re have all brought new, first-time cat bond sponsors to market, while Oak Leaf Re 2013-1 was the third issuance in three years for a smaller Florida homeowners insurer.

As this trend for privately-placed, smaller and more cost-effective cat bonds continues to grow, particularly if lower pricing trends persist, we expect more first-time sponsors to consider catastrophe bonds as a component of their overall reinsurance protection.