Armor Re Ltd. (Series 2013-1)

Armor Re Ltd. is a Bermuda domiciled special purpose vehicle, registered on the 3rd of April 2013, according to the public register. It has been registered for the purpose of issuing series of catastrophe bond notes, of which this Series 2013-1 issuance is the first.

Armor Re Ltd. is seeking to issue a Series 2013-1 tranche of cat bond notes to secure Florida wind and hurricane protection for Florida focused insurer of commercial residential properties, and first-time cat bond sponsor, American Coastal Insurance Company.

With this deal American Coastal Insurance is seeking to secure a source of fully-collateralized reinsurance protection using an indemnity trigger with a one-year risk period. The risk period is expected to run from the 1st June until the end of May 2014. Coverage is for named Florida storms, so tropical cyclones, storms and hurricanes given names by the National Hurricane Center.

The protection provided by Armor Re will be from named storms which affect the underlying book of commercial residential property insurance business.

The cat bond is being marketed with an initial size of $125m and will provide a percentage of cover on a $200m top-layer of the reinsurance tower.

The layer of protection provided by Armor Re Ltd. sits above American Coastal Insurance’s reinsurance tower including reinsurance cover from the Florida Hurricane Catastrophe Facility. These reinsurance layers are inured to the layer that Armor Re covers, we understand, but the private reinsurance layers do not have reinstatement provisions meaning that they can be eroded by storms, with no automatic reinstatement. It appears that depending on whether the sponsor chose to replace an eroded layer of non-reinstating reinsurance, the attachment point for the Armor Re cat bond could effectively be lowered as the reinsurance layers beneath were removed.

The notes cover losses between an initial attachment point of $913m ($75m net of reinsurance as there is a $75m layer of retention at the foot of the reinsurance tower) and the exhaustion point of $1.113 billion ($275m net of reinsurance).

The initial probability of attachment is 0.42%, initial expected loss is 0.34% and the initial probability of exhaustion is 0.3%.

Risk modeller AIR Worldwide performed a historical loss analysis and found that there had not been any individual events or indeed years which would have seen losses reach the attachment point and trigger a loss to noteholders. Because of the composition of the underlying book of business the risk of attachment for this cat bond is relatively remote.

The storms that caused the greatest estimate of gross losses, including loss adjustment expense, were the no-name storm of 1928 in Florida causing estimated losses of $291m; the no-name storm of 1926 that impacted Florida and Alabama causing estimated losses of $270.4m; and the no-name storm of 1947 affecting Florida and Louisiana and causing estimated losses of $268m. Those three years are the years with the highest total losses on a modelled basis, no other years with multiple qualifying storms reached the level of losses seen in 1947, according to S&P’s report.

In terms of contribution to expected loss, the majority of the risk is attributed to apartments and condominiums, primarily of masonry construction. Palm Beach, Pinellas, Collier, Sarasota and Lee counties in Florida are the top five counties in terms of expected loss.

Proceeds from the sale of the cat bond notes will be held in a collateral account and invested in U.S. treasury money-market funds which are highly rated. Bank Of New York Mellon are acting as indenture trustee and reinsurance account trustee.

This is a reasonably low-risk cat bond deal. As a result the price guidance is not that high for Florida wind, we’re told Armor Re is being marketed with a coupon range of 4.75% to 5.5% above the return of the money-market funds.

S&P notes that credit risk for this deal is mitigated as American Coastal will prepay the quarterly insurance premium for the entire risk period at the deals closing. S&P also notes that if there is a potential covered event, American Coastal will pay servicer fees in advance. These are important points for investors and will help make investors more comfortable with the deal from a new cat bond sponsor.

Update: This cat bond grew to $183m during marketing, although it still targets $200m we believe. The pricing guidance on the transaction was reduced down to 4.25% to 5%.

Update 2: The pricing closed at the lower end of the already reduced range at 4.25%.