Avatar’s Casablanca Re cat bond term shortened to one-year

The term of Avatar Property and Casualty Insurance Company’s latest catastrophe bond was shortened to one year just before its issuance, as the insurer settled for a single year of reinsurance coverage from the $65 million Casablanca Re Pte. Ltd. (Series 2020-1) transaction.

The reason for the shortening of the term of Avatar’s new catastrophe bond is almost certainly related to the pricing, with the sponsor likely to have opted for a single year of Florida named storm reinsurance protection rather than locking in the cost of coverage over the originally proposed three-year term.

The Casablanca Re 2020-1 catastrophe bond was launched at a target size of $65 million last month, aiming to provide Avatar at least a partial renewal of its soon to mature $100 million Casablanca Re Ltd. (Series 2017-1) transaction.

This is Avatar’s second cat bond issuance, but its first to be domiciled in Singapore.

The transaction was supposed to provide Avatar with indemnity reinsurance protection, on a cascading and per-occurrence basis, against losses from Florida named storms (so tropical storms and hurricanes), to begin, the covered area could be expanded at future resets, across a three-year term.

But now it appears the term was shortened to just a single year, likely as a reflection of higher pricing.

The Casablanca Re offering had already been updated with new and much higher coupons, as the pricing rose by roughly 16% to 18% across the two tranches in response to Florida reinsurance market hardening and ILS investors demand for higher returns.

Then, the transaction structure was changed to that of a zero coupon bond and then the term was shortened as well.

Given the reinsurance price increases experienced by Avatar with its latest catastrophe bond it has likely become less appealing to lock the coverage in at fixed cost across three years, hence the shortening of the term to just a single year deal.

Finally, the issuance featured a $40 million Series 2020-1 Class A tranche of notes with an initial expected loss of 1.12% and paying 91.75% of principal, which implies a coupon equivalent premium of 8.25%.

As well as a $25 million Class B tranche with an initial expected loss of 2.35%, that are set to pay investors 87.5% of principal, which implies a coupon equivalent premium of 12.5%.

The price increase during the marketing of the cat bond was particularly steep, as the Class A notes had at first been offered with coupon guidance of 6% to 6.5%, while the Class B notes had been offered with coupon guidance of 8% to 8.5%.

By shortening the term and switching to a zero coupon like structure, Avatar has been able to secure this one-year $65 million source of reinsurance from the capital markets on a collateralised basis.

The insurer will be hoping for market conditions to have moved on in a year’s time, when it may to come back to market with a further deal to extend the coverage.

You can read all about this new Casablanca Re Pte. Ltd. (Series 2020-1) catastrophe bond from Avatar Property and Casualty Insurance and every other cat bond transaction in the extensive Artemis Deal Directory.