Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

First Coast Re Ltd. (Series 2016-1)

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First Coast Re Ltd. (Series 2016-1) – At a glance:

  • Issuer: First Coast Re Ltd.
  • Cedent / sponsor: Security First Insurance Company
  • Placement / structuring agent/s: Swiss Re Capital Markets and GC Securities are joint structuring agents and bookrunners.
  • Risk modelling / calculation agents etc: AIR Worldwide
  • Risks / perils covered: Florida named storm, severe thunderstorm
  • Size: $75m
  • Trigger type: Indemnity
  • Ratings: ?
  • Date of issue: May 2016

First Coast Re Ltd. (Series 2016-1) – Full details:

Security First Insurance is a Floridian primary property insurance company founded in 2005. It underwrites homeowners, rental and condominium insurance and has also participated in the Florida Citizens depopulation program.

For this catastrophe bond recently registered Bermuda special purpose insurer First Coast Re Ltd. will seek to issue and sell to investors a single tranche of Series 2016-1 Class A notes, which have a preliminary size of $100m.

The notes will collateralise a retrocessional reinsurance agreement with Swiss Re, while Swiss Re will enter into a reinsurance agreement with Security First Insurance so passing on the capital markets coverage to the insurer.

The First Coast Re 2016-1 cat bond notes will cover losses from Florida named storms and severe thunderstorms. The coverage is for Swiss Re, but is ultimately based on the indemnity experience of Security First, we understand.

The First Coast Re Class A notes provide their protection on a per-occurrence basis, using an indemnity trigger based on Security First’s loss experience, providing reinsurance across a three-year term.

The First Coast Re 2016-1 cat bond notes will sit at the top of Security First Insurance’s reinsurance tower, but we’re told they feature a top and drop structure, so as catastrophe losses affected the insurers reinsurance provisions the cat bond attachment would drop down to replace any eroded reinsurance layers.

So, given the top and drop structure of this First Coast Re cat bond, it effectively means the notes have an attachment point that will change after the insurer is hit by catastrophe events, even if those events do not hit the cat bond itself.

The single tranche of Series 2016-1 Class A notes that will be issued by First Coast Re Ltd. initially cover a layer of risk in Security First’s reinsurance tower above $1.112 billion of losses, but are said to attach at $5m for the first two events, $2m of the next two and $0 for subsequent events. But those figures really represent retention on the covered layer reducing as it drops down, it appears.

The notes have an attachment probability of 1.2% and an expected loss of 1.15%. We understand that they are being offered to ILS investors with price guidance of 4.25% to 4.75%, which would reflect a reasonably high multiple of at least 3.7 times the base expected loss. The high multiple likely reflects the top and drop structure, as the attachment probability will effectively be higher as the cat bond notes dropped down.

Update 1:

The target size for this First Coast Re cat bond has been reduced from $100m to $75m, the spread guidance for the single tranche of Class A notes has also been reduced to below the initial guidance range.

When the cat bond transaction launched to investors it was offering the notes with coupon price guidance of 4.25% to 4.75%, but this has now been lowered and narrowed to 4% to 4.25%, which with the 1.15% expected loss still suggests a multiple of 3.5 times or above.

That’s still a higher multiple than many cat bonds with comparable spreads, which is likely due to the top and drop nature of the protection which enables these cat bond notes to drop down Security First’s protection tower as losses erode its lower layers of reinsurance protection.

The size of the First Coast Re cat bond is likely to be driven by Security First’s overall reinsurance purchase for the upcoming renewal, hence the reduction shouldn’t be considered an inability to place the notes but more likely a reflection of where the most effective pricing can be found.

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