American Strategic Insurance Group’s second catastrophe bond issuance, the currently in the market $200 million Bonanza Re Ltd. (Series 2016-1), has now been priced at the low-end of the already reduced guidance, once again reflecting the strong appetite investors have for new cat bond issues.
Not only does this pricing reflect the willingness to deploy capital among institutional investors in insurance-linked securities (ILS), it also reflects a comfort level with the sponsor of the Gator Re Ltd. cat bond, which has generated headlines and questions of its own as the aggregate reported losses mounted up.
While the Bonanza Re cat bond covers the same perils as Gator Re did and with a similar top and drop structure, the fact this transaction is a per-occurrence cat bond, while the Gator deal was an annual aggregate, has also likely helped to increase its popularity among the ILS investor base.
So now priced, the Bonanza Re cat bond will provide American Strategic with a $200 million fully collateralised source of reinsurance protection against losses from U.S. named storm and severe thunderstorm risks, on an indemnity trigger and per-occurrence basis.
The $150m Class A tranche of notes, which will provide reinsurance protection against both U.S. named storm and thunderstorm losses, launched with price guidance of 4% to 5%, which was subsequently narrowed and lowered to a range of 3.75% to 4%.
But at pricing yesterday, Artemis understands that the Class A notes have been priced at 3.75%, the bottom of the already reduced coupon range. With a 2.22% attachment probability and an expected loss of 1.52%, this Class A tranche will offer investors a multiple of 2.5 times the expected loss.
The $50m Class B tranche that will provide U.S. named storm only reinsurance protection were initially marketed with price guidance of 5.5% to 6%. That was subsequently narrowed and dropped to a 5% to 5.5% coupon range.
At pricing this Class B tranche were priced with a coupon of 5%, again at the bottom of the reduced range. With an attachment probability of 4.08% and an expected loss of 2.19%, this tranche will offer investors a multiple of almost 2.3 times the expected loss.
Both multiples, calculated using the initial expected loss, are in-line with other transactions that have hit the catastrophe bond market in recent months, so it seems that the Bonanza Re deal was launched with pricing guidance that was likely to decline.
That certainly had the desired effect of attracting investor interest and then the appetite of those investors supported the reduction in pricing down to a level consistent with the market at this time.
So American Strategic will benefit from $200 million of capital market backed reinsurance in 2017. Cleverly, while the Bonanza Re cat bond is set to complete as of 1st December, the risk period only begins as of June 1st 2017.
So with this cat bond issuance American Strategic has secured a key layer of its catastrophe reinsurance program for the June 2017 renewal already, locking in the attractive rates possible in the ILS market.