Pricing has been set for the Laetere Re Ltd. (Series 2016-1) catastrophe bond transaction, which is being sponsored by three United Insurance Holdings subsidiaries seeking a $100m source of fully collateralized reinsurance.
When the Laetere Re 2016 cat bond launched ten days ago, the preliminary size of the transaction was said to be $100m. That hasn’t changed, we understand, and the cat bond has now been priced with the three tranches of notes still set to offer United subsidiaries United Property & Casualty Insurance Co., Family Security Insurance Co. and Interboro Insurance Co., $100m of capital markets and ILS capital backed reinsurance coverage.
Laetere Re 2016 will provide the United Insurance Holdings subsidiaries with a $100m one-year source of U.S. named storm and earthquake reinsurance, on an indemnity trigger and cascading per-occurrence protection basis, so as any loss events erode the reinsurance tower covering the three ceding insurers, the three tranches of Series 2016-1 cat bond notes come into play.
Pricing has now been set for the three tranches of cat bond notes that Laetere Re Ltd. is issuing, with two tranches moving to the lower end of guidance while the third and riskiest saw pricing settle at the mid-point of the marketed range.
This transaction is being structured more like a reinsurance contract, being one-year and on a discounted basis (like a collateralized reinsurance contract would be) with the ceding insurer paying the premium upfront into the trust account to make up the principal.
That means investors earn their coupon up front, by paying discounted principal for the notes and therefore pricing is offered as a discount to face value.
The $30m Class A tranche of notes, which are the least risky, launched with price guidance of 93.25% – 94% (what investors would pay upfront in terms of principal). We’re told that this has been fixed now at the upper end of that range, so the coupon or premium for the one-year deal can be thought of as 6% for the Class A notes, so coupon pricing has effectively been reduced.
The $40m Class B tranche, the mid-risk notes, launched with guidance of 89.5% to 90.5%, and pricing has now been fixed at the 90.5% level, suggesting a drop in coupon pricing during marketing and fixing it at a discount of 9.5% of principal.
Finally, the most risky tranche of Class C notes launched with guidance of 82% to 83%, effectively a high 17% to 18% premium or coupon, and this has now been fixed at the middle of guidance, at 82.5%, so a 17.5% coupon on a discounted basis.
So pricing or premium of this layer of capital markets backed reinsurance has become more attractive for United, during the deals marketing. Meaning that the notes, which will sit on top of one another in United’s reinsurance tower and due to their cascading nature, will play a core part of the protection the insurers have, at lower than initially marketed pricing.