Topanga Re Ltd. (Series 2021-1)

This is the first catastrophe bond transaction to be sponsored by Farmers Insurance Group, the US insurer that operates across a number of reciprocal insurer brands and has links to Zurich Insurance Group.

The company is seeking multi-year and multi-peril US catastrophe reinsurance protection from the capital markets with this Topanga Re Ltd. catastrophe bond.

Farmers Insurance Group aims to secure a minimum $100 million of per-occurrence catastrophe reinsurance protection and an as yet unsized amount of annual aggregate catastrophe reinsurance protection, through the support of ILS funds and investors with this Topanga Re cat bond deal, sources have told us.

Topanga Re Ltd. was registered as a special purpose insurer (SPI) in Bermuda earlier this year and the vehicle will seek to issue two tranches of Series 2021-1 notes, which will be sold to investors and the proceeds used as collateral to underpin reinsurance transactions between the SPI and Farmers Insurance Group.

The two tranches of notes will both provide Farmers with reinsurance protection against certain losses from named storms, earthquakes, severe weather and wildfires affecting the United States.

A $100 million Class A tranche of notes are being issued to provide Farmers with per-occurrence and indemnity trigger protection over a four-year term to the end of 2025, we understand.

The Class A tranche of notes have an initial attachment probability of 1.88%, an initial expected loss of 1.49% and are being offered to catastrophe bond investors with price guidance in a range from 4.25% to 4.75%.

The Class B tranche of notes are as yet unsized, we’re told, and target annual aggregate indemnity reinsurance coverage for Farmers, over just a two-year term to the end of 2023.

The Class B tranche of notes come with an initial attachment probability of 1.34%, an initial expected loss of 1.03% and are being offered to cat bond investors with a particularly high, already fixed coupon at 15%.

Quite why the Class B notes are offering such a high multiple is unclear, as we lack information on the transaction to fully-understand that.

It could be that the notes have a cascading feature and could drop-down if inuring reinsurance beneath them is eroded, which would raise the attachment probability, but we cannot be certain. It is also a reflection of the high cost of aggregate reinsurance protection, of course, but it seems likely there is something else structural to this high coupon.

Update 1:

The Class A tranche of notes remained at $100 million in size and their pricing was fixed at 4.75%, which was the upper-end of guidance.

The Class B tranche of notes ended up targeting between $50 million and $60 million of protection for Farmers, while their pricing remained at the 15% it was originally fixed at.

Update 2:

We understand that the Topanga Re cat bond was successfully upsized to the $160 million target.

The Class A notes settled at $100 million in size, with pricing at the top-end of initial guidance at 4.75%.

The Class B tranche grew to $60 million, while their pricing remained at the 15% level.