The first catastrophe bond sponsored by Lloyd’s of London ICAT Syndicate 4242, Buffalo Re Ltd. (Series 2017-1), has now been priced and the spreads settled at the bottom end of the lowered guidance, once again reflecting demand for cat bond investments at this juncture.
ICAT Syndicate 4242 saw its debut cat bond issue increase in size, from a launch at $125 million to $164.5 million, during the marketing of the deal, while at the same time the spread guidance on its two tranches of notes were lowered to below the launch range.
ICAT’s Buffalo Re 2017-1 catastrophe bond transaction sees the Lloyd’s syndicate seeking a fully collateralised source of reinsurance protection to cover losses from U.S. named storms and U.S. earthquakes, over a three-year risk period, on an indemnity and per-occurrence basis.
The two tranches of Series 2017-1 notes being issued by Buffalo Re will provide coverage in a drop-down structure (more details in our previous article).
The cat bond began life as a $125 million transaction, with a $70 million Class A tranche and $50 million Class B tranche of notes, but then upsized by almost 32%, to $164.5 million with a $105 million Class A tranche and a $59.5 million Class B tranche.
But size aside, the coupon pricing is the real story in this cat bond, as it has been in all recent issues, as investor demand has helped to drive the price down, ultimately making the reinsurance coverage more cost-effective for the sponsor ICAT.
The $105 million of Class A notes launched with price guidance of 3.25% to 3.75%, which was then dropped to the bottom end at 3.25%. This tranche has now been priced at the 3.25% spread, so the lowest end of initial guidance.
The $59.5 million of Class B notes launched with guidance of 7.25% to 7.75%, but that range was lowered to 6.75% to 7% during marketing. At final pricing we’re told this tranche saw the coupon settle at the low end of reduced guidance at 6.75%.
The Class A notes have an expected loss of 1.18% initially, so with pricing of 3.25% that implies a multiple to investors of 2.75x. The Class B notes have an expected loss of 4.09%, so with pricing of 6.75% will pay investors a multiple of 1.65x.
ICAT Syndicate 4242’s first catastrophe bond has clearly been well-received, helping the Lloyd’s syndicate to secure reinsurance from the capital market at a cost that is likely attractive compared to traditional sources.
The way pricing has come down on cat bond issues in recent months should translate into additional issuance, as both repeat and new sponsors look to take advantage of capital market efficiencies to secure layers of their reinsurance program from a diversifying source.