Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

$100m Laetere Re 2016 cat bond launched for United subsidiaries


A new catastrophe bond has launched to investors, bringing another new sponsor to market, as three United Insurance Holdings subsidiaries seek at least $100m of fully collateralized reinsurance through a Laetere Re Ltd. (Series 2016-1) issuance.

The first catastrophe bond to come from the Florida headquartered United Insurance Holdings group, this Laetere Re 2016-1 transaction sees three of the firms subsidiaries, which we understand to be United Property & Casualty Insurance Co., Family Security Insurance Co. and Interboro Insurance Co., looking to tap the capital markets and ILS investors for a source of reinsurance coverage.

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 the three named ceding insurers with U.S. named storm and earthquake reinsurance across a one-year term.

It’s actually becoming increasingly rare to see one-year catastrophe bond deals, unless they are privately transacted, but for a first-time sponsor which is growing and expanding into new regions it can make sense as a way to diversify sources of risk transfer, as well as try something new.

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.

We haven’t recorded a catastrophe bond paying a coupon above 17% since late 2013, making this transaction quite unusual, but also likely to be attractive to investors seeking higher yielding notes to boost their portfolio returns.

We understand that this transaction is being brought to market by Swiss Re Capital Markets, acting as sole structuring agent and bookrunner. AIR Worldwide is providing risk modelling services.

With this cat bond set to provide a core part of the reinsurance tower for United Insurance Holding’s three subsidiaries, due to the notes sitting on top of one another and their cascading nature, this shows a desire at the ceding companies to tap the capital markets, as well as an appreciation of the need to diversify sources of risk capital and that the ILS market can be very competitive on price.

We understand that the Laetere Re Ltd. (Series 2016-1) is targeted for issuance by the end of this month, we’ll update you as information becomes available.

You can read all about this and every other cat bond in the Artemis Deal Directory.

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