Ibis Re II Ltd. (Series 2013-1)

Ibis Re II is Assurants Cayman Islands domiciled special purpose insurer which it established in 2012. This 2013-1 issuance sees Assurant looking to expand its capital markets reinsurance protection for U.S. hurricane through three tranches of cat bond notes.

The actual cedents for this deal are Assurant subsidiaries, American Security Insurance Co., American Bankers Insurance Co. of FL, Standard Guaranty Insurance Co., and Voyager Indemnity Insurance Co.

The Ibis Re II 2013-1 cat bond is split into three tranches and is being marketed as offering $175m of notes, we understand from our sources. All three tranches are exposed to the same U.S. hurricane risk, across the main U.S. wind exposed states and also Puerto Rico.

The covered area includes; Alabama, Arkansas, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Mississippi, Missouri, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Vermont, Virginia, West Virginia, the District of Columbia, and Puerto Rico.

The cat bond uses an interesting reporting agency, one which is not utilised particularly often in the market, the Verisk Catastrophe Index. This means the trigger used will be a county-weighted industry loss index. The cover the notes afford Assurant will be on a per-occurrence basis.

The Ibis Re 2012-1 cat bond was the first recorded in our Deal Directory to use the Verisk Catastrophe Index. The Verisk catastrophe index reports, through which the industry loss data is reported, show insured losses on a county level multiplied by predetermined county payout factors (weighting) for personal, commercial and auto lines of business.

The Verisk county-weighted, line of business based approach to loss reporting clearly suits Assurants portfolio, hence utilising it again. For this deal the trigger is based on personal line of business losses only.

The three tranches of notes are all relatively focused on Florida hurricane risk, with the state of Florida making up the largest contribution to the expected losses of each tranche.

The Class A tranche of notes have an initial size of $100m, an attachment probability of 0.79%, an expected loss of 0.73% and an exhaustion probability of 0.65% and are the least risky notes. The Class B notes are currently $35m in size, have an attachment probability of 2.02%, an expected loss of 1.35% and an exhaustion point of 0.88%. The Class C notes are riskiest, currently sized at $40m, have an attachment probability of 4.12%, an expected loss of 2.98% and an exhaustion point of 2.04%.

All three tranches of notes will be sold to collateralized an index-based risk transfer via reinsurance agreement to provide protection on a per-occurrence basis over a 3-year risk period to the ceding insurers against hurricane in the covered area.

At the currently marketed tranche sizes, the class A notes will cover 50% of losses between an initial attachment point of $1.86 billion and an initial exhaustion point of $2.06 billion. The class B notes cover 5% of losses between an initial attachment point of $1.06 billion and an initial exhaustion point of $1.76 billion, and the class C notes cover 10% of losses between an initial attachment point of $660 million and an initial exhaustion point of $1.06 billion.

The Class A notes are being marketed with a coupon guidance interest spread of 3.5% to 4%, the Class B notes are being offered with an interest range of 4.5% to 5.25% and the Class C notes are offering a spread of 8% to 8.75%. We expect to see a modicum of tightening on these as pricing is finalised, however they do look reasonable given the risk profile and current market appetite.

Risk modelling of historical hurricanes showed that no known storms would have reached the attachment point for the Class A, least risky notes. For the Class B Notes, the 1926 “no-name” hurricane (which made landfall in Florida and Alabama) and 1992′s Hurricane Andrew would have generated principal losses of 100% and 13% respectively on the Class B tranche of notes. The Class C notes would have been affected by those two storms and also the 1928 “no-name” Florida hurricane, with the three events causing principal losses of 100%, 100% and 60% respectively.

While the contribution from Puerto Rico to expected losses has risen over the 2012 Ibis Re cat bond, it is still very low compared to Florida which is where much of the risk from this cat bond lies. Puerto Rico contributes only 5.5% for the Class A notes, 9% for the Class B notes, and 10.1% for Class C notes, to expected losses, whereas the contribution to expected loss from Florida is 80.4% (class A), 75.0% (class B), and 66.9% (class C).

Collateral from the sale of the Ibis Re II notes will be deposited in a reinsurance trust account, for each class of notes, and invested in one or more Treasury money-market funds. The collateral and trust accounts will be managed by Deutsche Bank Trust Co. Americas.

At the annual reset there are limitations to how much the risk profile of the deal can change with respect to expected losses in different U.S. states. The modeled contribution to expected losses for Florida will not be less than 65% for the Class A notes, 60% for the Class B notes, and 50% for the Class C notes.

Update: This cat bond increased in size slightly before close, to $185m. he other two tranches remain the same size, at $35m for the Class B notes and $40m for the Class C notes.

The Class A notes increased from $100m to $110m. Pricing actually increased on this tranche slightly. The Class A, tranche began marketing with price guidance coupon range of 3.5% to 4%, but at the latest update the slightly larger tranche is now being offered with a 4% interest coupon, an increase in pricing of 6.7% from the mid-point of the original range.

The Class B notes have priced down from the original range of interest range of 4.5% to 5.25% to now be offered at a coupon of 4.5%, the lower end of the original range, a drop of 7.7% on pricing from the mid-point of the original range. The Class C notes launched with a price guide range of 8% to 8.75% and that has dropped to the bottom end of the range at 8%, a 4.5% reduction from the original price guide mid-point.

Update 2: The deal completed with no further changes to the above pricing.

S&P said, on rating the deal, “The class A notes will cover 55% of losses between the initial attachment point of $1.86 billion and the initial exhaustion point of $2.06 billion. The class B notes will cover 5% of losses between the initial attachment point of $1.06 billion and the initial exhaustion point of $1.76 billion, and the class C notes will cover 10% of losses between the initial attachment point of $660 million and $1.06 billion.”