Sutter Re Ltd. (Series 2020-1 & 2020-2)

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Sutter Re Ltd. (Series 2020-1 & 2020-2) – At a glance:

  • Issuer: Sutter Re Ltd.
  • Cedent / sponsor: California Earthquake Authority
  • Placement / structuring agent/s: Aon Securities is sole structuring agent and joint bookrunner. Swiss Re Capital Markets is joint bookrunner.
  • Risk modelling / calculation agents etc: EQECAT
  • Risks / perils covered: California earthquake
  • Size: $700m
  • Trigger type: Indemnity
  • Ratings: NR
  • Date of issue: May 2020

Sutter Re Ltd. (Series 2020-1 & 2020-2) – Full details:

The CEA has returned with a new special purpose insurer in Bermuda registered Sutter Re Ltd., as it seeks to add more capital markets backed protection to its reinsurance tower.

For its first issuance we’re told that Sutter Re Ltd. will seek to issue four tranches of cat bond notes across two series, seeking upwards of $400 million of California earthquake reinsurance protection across the issuance.

With the Sutter Re catastrophe bonds, the CEA will benefit from multi-year, fully collateralised reinsurance protection against earthquakes in California on an annual aggregate and indemnity trigger basis, we understand from our sources.

Two tranches of notes will provide coverage across a two-year term (the Series 2020-2 notes) and two tranches across three years (the Series 2020-1 notes) it seems, with each featuring annual loss occurrence periods for the purpose of aggregation.

Each of the Series of catastrophe bond notes to be issued by Sutter Re Ltd. have Class A and Class F tranches. The Class A notes and Class F notes each have the same risk metrics and pricing, with the only differences being the term of two or three years depending on which Series they came from.

The CEA is targeting at least $200 million from each Series of this issuance, but it seems likely that if investor appetite was strong enough for the longer term three-year notes under the 2020-1 tranches, then we could see those upsized the most.

The reason for issuing two and three year notes at the same time could be so the CEA can stagger its renewals of catastrophe bonds, but also a way to see how investors respond to the pricing of an annual aggregate deal over the different durations.

The Series 2020-1 Class A Notes will provide three years of cover, attaching above a $6.472 billion retention and covering a $500 million layer of the CEA’s reinsurance program, giving them an initial expected loss of 1.21% and price guidance of 4.5% to 5%.

The Series 2020-1 Class F Notes will provide three years of cover, attaching above a $2.1 billion retention and covering a $500 million layer of the CEA’s reinsurance program, giving them an initial expected loss of 3.69% and price guidance of 8% to 8.5%.

The Series 2020-2 Class A Notes will provide two years of cover, attaching above a $6.472 billion retention and covering a $500 million layer of the CEA’s reinsurance program, giving them an initial expected loss of 1.21% and price guidance of 4.5% to 5%.

The Series 2020-1 Class F Notes will provide two years of cover, attaching above a $2.1 billion retention and covering a $500 million layer of the CEA’s reinsurance program, giving them an initial expected loss of 3.69% and price guidance of 8% to 8.5%.

So as you can see from the above, the difference is only in duration of coverage between the identical risk bearing tranches of notes, suggesting the desire to stagger renewals may be the stronger motivator.

One other key difference between this new catastrophe bond issuance from the CEA and its previous deals, is that while they all provided annual aggregate earthquake reinsurance protection, this new transaction also has an hours clause factor that would allow losses from strong aftershocks to qualify.

We’re told the cat bond notes will provide the CEA with reinsurance for the first earthquake loss and then also any subsequent quake losses within a 360 hour period after the initial qualifying event.

Not only does that cover the CEA for aftershocks, it also means the CEA would be covered where a foreshock causes a loss and the main quake occurred later, within that 360 hour period.

As a result this seems a sensible addition to the insurers reinsurance program.

Update 1:

The CEA has lifted its overall target for the two series cat bond issuance, with it now said to be from $500 million at minimum, up to a maximum of $700 million of protection across the four tranches being sold to investors.

The issuance will now seek a maximum of $400 million of protection for the CEA from each Series of notes issued, but $700 million is said to be the maximum across the two series and four tranches issued.

While set to upsize, perhaps significantly, the price guidance for all tranches of notes that Sutter Re will issue have moved up to the top-ends of guidance, we’ve been told.

As a result, the Series 2020-1 Class A Notes are now priced at 5%, the Series 2020-1 Class F Notes at 8.5%, the Series 2020-2 Class A Notes at 5% and the Series 2020-2 Class F Notes at 8.5%.

Update 2:

We understand that the targeted issuance size has lifted again and its range narrowed, as our sources said that the CEA is now aiming for between $625 million and as much as $740 million of reinsurance coverage from this cat bond.

As we understand it from our sources, the offering now looks like this.

The Series 2020-1 Class A Notes, with a three year term and an initial expected loss of 1.21%, are targeting an issuance size of $175 million to $200 million at pricing of 5%.

The Series 2020-1 Class F Notes, also with a three year term and with an initial expected loss of 3.69%, are targeting between $100 million and $140 million of coverage for the CEA, with pricing of 8.5%.

The Series 2020-2 Class A Notes which will provide two years of cover and have an initial expected loss of 1.21%, target $200 million to $225 million in terms of issuance size, at pricing of 5%.

Finally, the Series 2020-2 Class F Notes which will also provide two years of cover and have an initial expected loss of 3.69%, are aiming for an issuance size of $150 million to $175 million at pricing of 8.5%.

So, at a minimum the CEA looks set to secure $625 million of California earthquake reinsurance protection from the capital markets with its new Sutter Re Ltd. catastrophe bonds, at a maximum that could be $740 million.

Update 3:

The California Earthquake Authority (CEA) settled for a $700 million catastrophe bond issuance with Sutter Re 2020-1 and 2020-2 in the end, representing a 75% upsizing of the deal during its marketing.

Now finalised, our sources said the Sutter Re catastrophe bond offering looks like this.

The Series 2020-1 Class A Notes, with a three year term and an initial expected loss of 1.21%, reached their maximum target of $200 million of protection, at pricing of 5%.

The Series 2020-1 Class F Notes, also with a three year term and with an initial expected loss of 3.69%, reached $135 million in size, close to their maximum target for the CEA, with pricing of 8.5%.

The Series 2020-2 Class A Notes which will provide two years of cover and have an initial expected loss of 1.21%, reached $215 million in terms of issuance size, again nearer the upper-end of targeted size, at pricing of 5%.

Finally, the Series 2020-2 Class F Notes which will also provide two years of cover and have an initial expected loss of 3.69%, stayed at the lower end of their targeted issuance size at $150 million, with pricing of 8.5%.

We understand that the Series 2020-1 issuance with a three-year term that is $335 million in size will complete on May 15th, while the Series 2020-2 issuance with a two-year term that is $365 million in size will complete on May 28th.

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