The Armor Re Ltd. (Series 2014-1) catastrophe bond, which launched just over a week ago, has grown in size to $200m, but we understand has priced at the top end of guidance suggesting that investors will not allocate capital to cat bonds at any cost.
Armor Re 2014-1, which is being sponsored by primary, Florida-focused, insurer American Coastal Insurance Company as the second takedown under its Armor Re program, will provide the insurer with a source of reinsurance protection against losses to its commercial residential book of business from named storms (so tropical storms and hurricanes) over three U.S. hurricane seasons.
The fully-collateralized reinsurance protection that Armor Re 2014-1 will provide to American Coastal is based on an indemnity trigger on a per-occurrence basis. While the initial coverage is for Florida named storms, the cat bond features an option to extend the protection to other U.S. states at the reset if American Coastal should choose to, giving it an option to broaden the coverage should its business ambitions become more expansive.
The deal launched offering a single tranche of Series 2014-1 notes sized at $150m and with a pricing guidance range of 3.5% to 4%. The Armor Re 2014-1 cat bond notes will attach at $75m of losses to American Coastal Insurance above its other reinsurance coverages up to an exhaustion point of $275m. Including the reinsurance layers beneath it the effective attachment point at launch is $984m of losses to the sponsor, but should reinsurance layers be eroded or not be replaced beneath that level, then the attachment point could potentially drop-down.
At final pricing yesterday, we understand that the cat bond had upsized by 33% to $200m, thus covering the full layer of American Coastal’s reinsurance program as we suggested it might in our article announcing the deal.
At the same time the pricing was fixed at the top end of guidance at 4%. This is the first cat bond to price right at the upper end of guidance in quite some time, with almost every deal pricing down, often below the launch guidance range.
However, suggestions that cat bond investors may have found their ultimate pricing floor may be a little premature, we understand it could be due to the structure of the layers in the American Coastal reinsurance program. Investors told Artemis that the reinsurance layers sitting beneath the Armor Re 2014-1 cat bond do not feature reinstatements, meaning that should they be eroded the cat bond may effectively become increasingly risky if these layers were not replaced. This has resulted in a cautious approach to this deal, with investors seeking the assurance of a higher coupon.
It’s encouraging to see investors pushing for a coupon which they feel is more commensurate with the risk they are assuming and unwilling to support a cat bond issue at any cost. With some suggesting recently that discipline is waning on pricing in Florida, with ILS market players singled out, this shows that discipline remains among the core of the ILS investors helping to push the price to the top end for this deal. As we suggested, recent suggestions of a lack of discipline are likely not aimed at the entire ILS market, rather at some specific actors within it.
While this may or may not signal an absolute floor on pricing, it does show that there is a point beyond which ILS investors are not willing to accept a risk. The floor, however, is not expected to be much further away for ILS in Florida, with now two examples of pricing coming in towards the upper end after Citizens record $1.5 billion Everglades 2014 priced towards the upper end.