A new catastrophe bond sponsor is coming to market with its first transaction, as a Torrey Pines Re Ltd. (Series 2017-1) deal targets $143 million of collateralized reinsurance protection for California-based Palomar Specialty Insurance Company.
Palomar Specialty Insurance Company is privately owned by private equity specialists Genstar Capital and has been growing steadily in recent years while expanding into new perils, writing largely short-tail property and catastrophe exposed lines.
As a result it’s an ideal example of a company that could benefit from catastrophe bond coverage and the efficiency of the capital markets, with its book of underwriting business made-up of the perils and risks that ILS funds and cat bond investors want to access.
Torrey Pines Re Ltd. (named after a San Diego area location) is a newly established special purpose vehicle set up to issue cat bonds to protect Palomar Specialty Insurance and its subsidiaries, we understand.
In this 2017-1 issuance, Torrey Pines Re will seek to issue three tranches of Series 2017-1 notes, which will be sold to ILS and cat bond investors in order to fully collateralize the underlying reinsurance arrangements between Torrey Pines Re Ltd. and Palomar.
The targeted amount of coverage is $143 million at launch, we’re told, with the reinsurance protection from the Torrey Pines Re cat bond set to provide Palomar with three years of coverage against losses from U.S. named storms, U.S. earthquakes and U.S. severe thunderstorms.
The multi-peril cat bond protection will be on a per-occurrence basis with the three tranches of notes all providing indemnity coverage and each able to drop-down as stated reinsurance layers beneath the cat bond were eroded by loss events, we understand.
A currently $45 million Class A tranche of notes will be issued to provide U.S. earthquake only protection, and have an initial attachment probability of 1.62%, an expected loss of 1.26% (both based on RMS v. 15 we’re told) and are offered to ILS investors with coupon guidance of 2.75% to 3.25%.
A $48 million Class B tranche also provide U.S. earthquake cover only, have an initial attachment probability of 2.67%, an expected loss of 2.08% (again RMS v. 15) and are offered with a spread guidance of 3.75% to 4.25%, we understand.
Finally, a $50 million Class C tranche of notes is the multi-peril layer of coverage, featuring U.S. named storm, earthquake and severe thunderstorm protection. This tranche has an attachment probability of 5.63%, an expected loss of 4.08% (both RMS v 15) and are offered with pricing guidance of 5.75% to 6.5%.
All three tranches sit above stated reinsurance layers which can be eroded, but interestingly the reinsurance layers are all multi-peril in nature, which we assume means that if these are eroded the earthquake only tranches of the Torrey Pines Re cat bond could drop-down anyway.
It’s encouraging to see another new catastrophe bond sponsor in 2017, as still the market is largely dominated by many of the usual suspects.