Casablanca Re Pte. Ltd. (Series 2020-1)

Florida focused insurer Avatar Property and Casualty Insurance Company has returned to the catastrophe bond market with a currently $65 million Casablanca Re Pte. Ltd. (Series 2020-1) transaction that is being issued out of Singapore.

Casablanca Re Pte. Ltd., a newly established Singapore special purpose reinsurance vehicle, will seek to issue two tranches of Series 2020-1 notes, currently targeting at least $65 million across the pair, with the notes to be sold to cat bond funds and investors and the proceeds used to collateralise reinsurance agreements between the issuing vehicle and sponsor Avatar.

Both tranches of notes will provide Avatar with reinsurance protection against losses from Florida named storms (so tropical storms and hurricanes) across a three-year term.

The area of coverage can be expanded at an annual reset, should Avatar have expanded and want to see coverage in a range of other hurricane exposed U.S. states.

The reinsurance protection will be on an indemnity trigger, cascading and per-occurrence basis, we understand, with the notes exposed to a single larger event, or dropping down for a second and subsequent event.

A Series 2020-1 Class A tranche of notes to be issued by Casablanca Re Pte. are currently sized at $40 million and have an initial expected loss of 1.12%. These notes are being offered to investors with coupon price guidance of 6% to 6.5% we understand.

A Class B tranche of notes are currently sized at $25 million and have an initial expected loss of 2.35%. This tranche are being offered to cat bond investors with price guidance in a range from 8% to 8.5%.

Both tranches attach at $17.5 million, which is the size of sub-layers in the reinsurance tower, but being cascading it would take a named storm loss event that reached at least $157.1 million up Avatar’s tower to trigger them on a first-event basis, or a $68.8 million second or subsequent event, we’ve been told.

Update 1:

We’re told that price guidance has been raised considerably for this catastrophe bond, as ILS investors continue to demand higher returns.

The Series 2020-1 Class A tranche of notes to be issued by Casablanca Re Pte. still target $40 million of coverage and have an initial expected loss of 1.12%. These notes were initially marketed to investors with coupon price guidance of 6% to 6.5%. We’re now told that the price guidance for the Class A notes has been lifted to 7% to 7.5%, around a 16% increase in pricing at the mid-point.

The Class B tranche of notes are still sized at $25 million and have an initial expected loss of 2.35%. This tranche were first offered to cat bond investors with price guidance in a range from 8% to 8.5%. We now understand that the guidance for this tranche has been raised by around 18% at the mid-point, with the new range being 9.5% to 10%.

Update 2:

We’re told that rather than providing investors a coupon payment, the offering has been amended such that the notes will be issued at a discount to par, similar to what you’d see with a zero coupon notes arrangement.

At the same time it seems that the now premium based return that catastrophe bond investors will receive from this transaction has risen further, with the returns now all coming from the premium paid by sponsor Avatar and no component from the return from permitted investments.

The Series 2020-1 Class A tranche of notes to be issued by Casablanca Re Pte. still target $40 million of coverage and have an initial expected loss of 1.12%.

But now the Class A notes are being offered to investors at an offering price of 91.75% of principal, which implies a coupon equivalent premium of 8.25%.

The Class B tranche of notes remain $25 million in size and have an initial expected loss of 2.35%.

But now, the Class B notes are being offered to investors at an offering price of 87.5% of principal, we’re told, which implies a coupon equivalent premium of 12.5%.

At the same time as these changes, this transaction has had its term reduced to just a single year, suggesting the sponsor was not keen to lock-in multi-year coverage at these pricing levels. The transaction is now set to only run until the end of May 2021.

Update 3:

The term of Avatar Property and Casualty Insurance Company’s latest catastrophe bond was shortened to one year just before its issuance, as the insurer settled for a single year of reinsurance coverage from the $65 million transaction.

The reason for the shortening of the term of Avatar’s new catastrophe bond is almost certainly related to the pricing, with the sponsor likely to have opted for a single year of Florida named storm reinsurance protection rather than locking in the cost of coverage over the originally proposed three-year term.

Finally, the issuance featured a $40 million Series 2020-1 Class A tranche of notes with an initial expected loss of 1.12% and paying 91.75% of principal, which implies a coupon equivalent premium of 8.25%.

As well as a $25 million Class B tranche with an initial expected loss of 2.35%, that are set to pay investors 87.5% of principal, which implies a coupon equivalent premium of 12.5%.