Louisiana Citizens Property Insurance Corporation will be delighted that it has returned to the catastrophe bond market. As we revealed last week, the Pelican Re Ltd. Series 2013-1 cat bond was likely to upsize and the price guidance had dropped. Now, we understand, when the cat bond priced yesterday the coupon being paid to investors had dropped even further and the deal upsized as expected to the maximum $140m we said was possible last week.
Last week when we wrote about the pricing drop the initial coupon guidance had dropped to 6.5% to 7% and the maximum coupon guidance had also fallen to 9.75% to 10%. Remember this deal has a useful on-request drop-down feature allowing the insurer to adjust exactly where the cat bond attachment point is and so where it provides cover within its reinsurance tower.
At pricing yesterday we understand that the initial coupon pricing for Pelican Re 2013 had dropped even further to just 6%, while the maximum coupon price fell in line with this to 9.25%.
Louisiana Citizens will be pleased with this pricing. If we took the mid-point that the deal was launched with, at 7.25% for the initial coupon, the cat bond pricing has dropped 1.25%, a reduction of around 17% in the amount that LA Citizens would pay to investors.
Should LA Citizens choose to use the drop-down feature and make this layer as risky as is allowed under the terms of the deal it would attach at around $193m and would pay the maximum coupon of 9.25%. Compare this to its Pelican Re Ltd. Series 2012-1 cat bond issued last year, which attaches at $200m and pays a coupon of 13.75% to investors, and it’s easy to see the difference in pricing that can be obtained in the cat bond market this year compared to the last.
Pelican Re 2013 has upsized as much as Louisiana Citizens were prepared to allow to price offering $140m of notes. This layer of its reinsurance coverage, given the vastly reduced pricing, increased size and multi-year nature of the cat bond will have been much more cost-effective than traditional reinsurance we imagine.
We’ll update you again when this cat bond completes, which we believe will be in the first week of May. You can read all about the Pelican Re Ltd. Series 2013-1 transaction in our article on the novel drop-down feature and in our catastrophe bond Deal Directory.