A new catastrophe bond has been launched for a Lloyd’s of London syndicate, with a $125 million Buffalo Re Ltd. (Series 2017-1) deal being marketed on behalf of sponsor ICAT Syndicate 4242, as it seeks to tap the capital markets for reinsurance capacity.
ICAT’s syndicate 4242 underwrites largely U.S. property risks in catastrophe exposed regions in the Lloyd’s of London marketplace, hence tapping the capital markets for a source of fully collateralised reinsurance protection makes a lot of sense for the Paraline owned syndicate.
Catastrophe bonds directly sponsored by Lloyd’s syndicates are rare. Syndicates are often one of the beneficiaries of cover, through an insurance or reinsurance group sponsor, but direct or sole syndicate sponsors haven’t been seen in many years (the last we recorded was in 2002).
Buffalo Re Ltd. is a newly established special purpose insurer set up to issue catastrophe bonds on behalf of ICAT.
This Buffalo Re 2017-1 cat bond issue sees ICAT Syndicate 4242 seeking a fully collateralised source of reinsurance protection against losses from U.S. named storms and U.S. earthquakes, over a three-year risk period.
Buffalo Re Ltd. is set to issue two tranche of notes we understand, with both exposed to named storms across the main tropical storm and hurricane exposed U.S. states and earthquakes across the entire U.S. and District of Colombia.
Protection will be afforded on an indemnity trigger and per-occurrence basis, with the protection from the two tranches cascading, so one dropping down to replace the other when fully eroded, we understand. An inuring reinsurance layer also exists beneath the cat bonds we’re told.
A Buffalo Re 2017-1 Class A tranche of notes have a preliminary size of $75 million and will attach at $70 million of losses, protection ICAT 4242 up to an exhaustion at $370 million of losses. This tranche of notes have an attachment probability of 2.29% and an expected loss of 1.18%.
A Buffalo Re 2017-1 Class B tranche are sized at $50 million. These notes will attach at $70 million of losses to ICAT 4242 and exhaust at $240 million. These notes have an attachment probability of 6.98% and an expected loss of 4.09%, so are riskier and essentially the first that would be eroded by losses, with the Class A note cover cascading down at that point.
In terms of pricing guidance, the less risky Class A notes are offered to investors with coupon guidance of 3.25% to 3.75%, we’re told. The riskier Class B notes will offer investors a coupon in the range of 7.25% to 7.75%.
Given the size of the layers each tranche covers there is significant room for ICAT Syndicate 4242 to elect to upsize this cat bond issuance if it chooses, so expanding the percentage of each layer reinsured via Buffalo Re Ltd.
The Buffalo Re 2017-1 catastrophe bond is being brought to market by Willis Capital Markets & Advisory, as sole structuring agent and bookrunner. RMS is providing risk modelling services.
It’s encouraging to see a new sponsor entering the catastrophe bond market, particularly one from the Lloyd’s of London marketplace. As more sponsors gain an appreciation of the benefits of capital market backed reinsurance protection we should see a steady flow of new companies looking to cat bonds as a component of their programs.