Laetere Re Ltd. (Series 2016-1)

Laetere Re Ltd., a new Bermuda domiciled special purpose insurer, will look to issue and sell to investors three tranches of cat bond notes, all of which will provide three named ceding insurer subsidiaries of United Insurance Holdings, United Property & Casualty Insurance Co., Family Security Insurance Co. and Interboro Insurance Co., with U.S. named storm and earthquake reinsurance across a one-year term.

The U.S. named storm coverage is for the usual suspect states of Florida, the Gulf and East coasts. The U.S. earthquake cover is for a more limited group of states, Massachusetts, Rhode Island, North & South Carolina and New Jersey, sources said.

The Laetere Re Ltd. cat bond features on an indemnity trigger and will provide cascading per-occurrence protection, so as any loss events erode the reinsurance tower covering the three ceding insurers, the three tranches of Series 2016-1 cat bond notes come into play.

A $30m Class A tranche of notes has an attachment probability of 3.08%, an exhaustion probability of 1.69% and an expected loss of 2.28%.

A $40m Class B tranche of notes has an attachment probability of 7.55%, an exhaustion probability of 3.08% and an expected loss of 4.97%.

Finally, a $30m Class C tranche has an attachment probability of 15.12%, an exhaustion probability of 7.55% and an expected loss of 11.25%.

We’re told that the transaction is being structured more like a reinsurance contract, in how it pays its coupon, so discounted with the ceding insurer paying the premium upfront into the trust account to make up the principal.

Effectively, this means investors earn their coupon up front, by paying discounted principal for the notes and therefore pricing is offered as a discount to face value.

Hence the Class A, which are the least risky, notes are offered with price guidance of 93.25% – 94%, but that is what investors will pay upfront in terms of principal. So the coupon or premium for the one-year deal can be thought of as 6% to 6.75% for the Class A tranche.

Class B, the mid-risk tranche, have price guidance of 89.5% to 90.5%, we’re told, which again translates to a one-year premium or coupon of 9.5% to 10.5%.

Finally, the most risky tranche of Class C notes come with price guidance of 82% to 83%, effectively a high 17% to 18% premium or coupon, on a discounted basis.

Update 1:

Pricing has now been set for the three tranches of cat bond notes that Laetere Re Ltd. is issuing, with two tranches moving to the lower end of guidance while the third and riskiest saw pricing settle at the mid-point of the marketed range.

The $30m Class A tranche of notes, which are the least risky, launched with price guidance of 93.25% – 94% (what investors would pay upfront in terms of principal). We’re told that this has been fixed now at the upper end of that range, so the coupon or premium for the one-year deal can be thought of as 6% for the Class A notes, so coupon pricing has effectively been reduced.

The $40m Class B tranche, the mid-risk notes, launched with guidance of 89.5% to 90.5%, and pricing has now been fixed at the 90.5% level, suggesting a drop in coupon pricing during marketing and fixing it at a discount of 9.5% of principal.

Finally, the most risky tranche of Class C notes launched with guidance of 82% to 83%, effectively a high 17% to 18% premium or coupon, and this has now been fixed at the middle of guidance, at 82.5%, so a 17.5% coupon on a discounted basis.

So pricing or premium of this layer of capital markets backed reinsurance has become more attractive for United, during the deals marketing.