New Bonanza Re catastrophe bond could triple in size to $300m

The new Bonanza Re Ltd. (Series 2020-2) catastrophe bond issuance could triple in size, as the transactions upper target has been lifted to provide as much as $300 million of reinsurance protection for ARX Holding, the Progressive-owned parent of American Strategic Insurance Group.

The Bonanza Re 2020-2 catastrophe bond will be the second of the year for ARX Holding, which owns the American Strategic group of insurance companies and also Progressive Property Insurance who will be the beneficiaries of the catastrophe reinsurance this transaction will provide.

When the cat bond was launched to the market, it was seeking at least $100 million of protection for the sponsor, from a three-tranche issue designed to provide multi-peril reinsurance protection to the sponsor.

Now, we’re told that one tranche of notes had been dropped from the Bonanza Re cat bond issuance, but the overall issuance size has increased considerably, with as much as $300 million of reinsurance protection now targeted.

Bonanza Re Ltd., a Bermuda domiciled special purpose insurer (SPI), will now issue two tranches of Series 2020-2 notes for this cat bond issuance.

The proceeds from the sale of the notes will collateralize underlying reinsurance agreements between Bonanza Re Ltd. and the ceding insurer, so the insurance entities owned by ARX Holding.

The Class A tranche of notes will provide U.S. named storm reinsurance protection on a per-occurrence and indemnity trigger basis, covering four wind seasons, coming on-risk from June 1st 2021 and running until the end of December 2024.

This tranche has now doubled in size from $100 million to $200 million, providing per-occurrence and U.S. wind only coverage. The notes have an initial expected loss of 1.04% and were first offered to investors with a coupon guidance range of 4.5% to 5%, but this guidance has now been fixed at the mid-point at 4.75%, we understand from sources.

As a result, the Class A notes will cover a $400 million layer of the ARX Holding reinsurance tower, alongside the firms $200 million 2020-1 cat bond.

The Class B tranche of notes, which will provide annual aggregate reinsurance protection on an indemnity basis, covering losses from U.S. named storms, severe thunderstorms, winter storms, wildfires, earthquakes across just a one year term, running through calendar year 2021, has now been sized at between $75 million and $100 million.

This tranche were first offered to investors as zero-coupon, discount notes with an initial expected loss of 0.36% and price guidance in a range from 90% to 88% of par, which equates to a roughly 10% to 12% coupon. We’re told the pricing has now been fixed at the high-end at 88% of par, so a roughly 12% coupon equivalent.

The second zero-coupon tranche of Class C notes has now been dropped from the issuance, we understand. These were a much riskier layer of notes and it’s possible pricing in the catastrophe bond market was just not conducive to their issuance, so they may have been taken privately or this layer is set to be transacted as reinsurance instead.

But the overall result for ARX and American Strategic is very positive, with the deal potentially set to triple in size and the company increasing the role of the insurance-linked securities (ILS) market in its reinsurance tower as a result.

We’ll keep you updated as the Bonanza Re Ltd. (Series 2020-2) transaction comes to market and you can read about this and every other cat bond deal in our extensive Deal Directory.