Buffalo Re Ltd. (Series 2017-1)

Buffalo Re 2017-1 is a new catastrophe bond sponsored by Lloyd’s of London catastrophe lines focused syndicate ICAT 4242.

Catastrophe bonds directly sponsored by Lloyd’s syndicates are rare. Syndicates are often one of the beneficiaries of cover, through an insurance or reinsurance group sponsor, but direct or sole syndicate sponsors haven’t been seen in many years (the last we recorded was in 2002).

Buffalo Re Ltd. is a newly established special purpose insurer set up to issue catastrophe bonds on behalf of ICAT.

This Buffalo Re 2017-1 cat bond issue sees ICAT Syndicate 4242 seeking a fully collateralised source of reinsurance protection against losses from U.S. named storms and U.S. earthquakes, over a three-year risk period.

Buffalo Re Ltd. is set to issue two tranche of notes we understand, with both exposed to named storms across the main tropical storm and hurricane exposed U.S. states and earthquakes across the entire U.S. and District of Colombia.

Protection will be afforded on an indemnity trigger and per-occurrence basis, with the protection from the two tranches cascading, so one dropping down to replace the other when fully eroded, we understand. An inuring reinsurance layer also exists beneath the cat bonds we’re told.

A Buffalo Re 2017-1 Class A tranche of notes have a preliminary size of $75 million and will attach at $70 million of losses, protection ICAT 4242 up to an exhaustion at $370 million of losses. This tranche of notes have an attachment probability of 2.29% and an expected loss of 1.18%.

A Buffalo Re 2017-1 Class B tranche are sized at $50 million. These notes will attach at $70 million of losses to ICAT 4242 and exhaust at $240 million. These notes have an attachment probability of 6.98% and an expected loss of 4.09%, so are riskier and essentially the first that would be eroded by losses, with the Class A note cover cascading down at that point.

In terms of pricing guidance, the less risky Class A notes are offered to investors with coupon guidance of 3.25% to 3.75%, we’re told. The riskier Class B notes will offer investors a coupon in the range of 7.25% to 7.75%.

Given the size of the layers each tranche covers there is significant room for ICAT Syndicate 4242 to elect to upsize this cat bond issuance if it chooses, so expanding the percentage of each layer reinsured via Buffalo Re Ltd.

Update 1:

The latest deal update shows that the Buffalo Re 2017-1 cat bond issuance has upsized by almost 32%, to now offer investors $164.5 million of notes.

The Buffalo Re 2017-1 Class A tranche of cat bond notes has grown to $105 million in size, we understand, while the Class B tranche has increased to $59.5 million.

The now $105 million of Class A notes were initially offered to investors with price guidance of 3.25% to 3.75%, but this has now been reduced to the lower end at 3.25%.

Meanwhile, the now $59.5 million of Class B notes, that were initially offered with guidance of 7.25% to 7.75%, have seen their pricing fall even further with the revised range now set at 6.75% to 7%, we understand.

Update 2:

At final pricing the two tranches both settled at the bottom of reduced guidance.

This $105 million Class A tranche priced at the 3.25% spread, so the lowest end of initial guidance. The $59.5 million of Class B notes saw the coupon settle also at the low end of reduced guidance at 6.75%.

The Class A notes have an expected loss of 1.18% initially, so with pricing of 3.25% that implies a multiple to investors of 2.75x. The Class B notes have an expected loss of 4.09%, so with pricing of 6.75% will pay investors a multiple of 1.65x.