The Skyline Re Ltd. (Series 2013-1) private catastrophe bond placement, which we first wrote about back in December here, has been successfully completed. The transaction upsized from the $50m it was initially marketed at to complete at $72m of limit ($61.2m of notes issued). Private cat bond specialist Towers Watson Capital Markets (TWCM) structured, arranged and placed the deal for the sponsor who can now be revealed as The Cincinnati Insurance Company, subsidiary of Cincinnati Financial Corporation.
The transaction involved a single tranche of notes being privately placed with capital market investors to collateralize an underlying reinsurance policy for The Cincinnati Insurance Company. The deal covers a $100m layer of risk, with a pro-rata limit of $72m which has been collateralized by the $61.2m of notes issued by Skyline Re and the net premium. It is the first time The Cincinnati Insurance Companies have sponsored a cat bond deal and we spoke with the TWCM team who worked on the deal to find out a little more about the motivations behind it.
TWCM played the lead role in getting this innovative deal to market, working closely with the firm’s brokerage arm to originate, structure, distribute and place the resulting cat bond notes with investors.
Rick Miller, senior vice president at TWCM, told us; “It was a partnership between TWCM and Towers Watson’s brokerage arm working seamlessly together to make the transaction come to fruition.”
TWCM wanted to help the deals sponsor, The Cincinnati Insurance Company, begin to build relationships with new capital markets sources of reinsurance and see this Skyline Re cat bond transaction as the first step along that road.
Michael Popkin, senior vice president at TWCM, commented; “Deals like this involve close dialogue with cedents through our brokers to find out their goals. What we’re seeing is that they want to begin to engage and build relationships with capital markets sources of capacity. For The Cincinnati Insurance Company we managed to put together a transaction which made sense for both the cedent and the investors in terms of risk and reward.”
In our discussions TWCM told us that Skyline Re 2013-1 involved a new layer of risk which was used for the purpose of putting together a transaction designed to facilitate the beginning of this conversation with the capital markets. They see it as just step one in the building of a long-term relationship with these investor counterparties for the cedent which should bring the cedent benefits in years to come as more could be added to transactions.
The deal has a term of just one year, during which The Cincinnati Insurance Company benefits from a $72m of limit fully collateralized source of reinsurance cover for certain of its New Madrid earthquake risks and severe convective storm or tornado risks. Cover is afforded on an indemnity trigger basis, with the New Madrid earthquake cover being on a per-occurrence basis and the convective storm cover being on an aggregate basis.
It’s an interesting deal which will have been well received by investors as it offered a degree of diversification within their ILS portfolios. New Madrid quake risk is not particularly common in the cat bond market and convective storm or tornado risk is usually part of a much larger multi-peril deal in the last year (since the Mariah cat bonds).
The structure of the Skyline Re 2013-1 cat bond has been designed to complement The Cincinnati Insurance Companies other sources of reinsurance cover and has been structured akin to an indemnity top-or-drop excess reinsurance program layer.
The sponsor can collect on both perils so long as the layers deductibles have been met. TWCM said it is best to think of the deal as similar to a two section collateralized reinsurance contract. The top coverage layer is for New Madrid earthquake risks in specified U.S. states while the severe thunderstorm is the drop coverage layer and is on a county basis.
TWCM said that the transaction closed at the “tight end of price guidance” suggesting that as with most recent cat bonds the pricing will have proved attractive and competitive with traditional sources of reinsurance coverage.
When asked what led to the upsizing of the deal, Rick Miller said; “The deal was well received by investors and Cincinnati was motivated to support the investors’ appetite for these notes. The deal was upsized to the degree that was possible within the cedents budget.”
On the pricing of the transaction, Miller said that; “Relative to the reinsurance limit, the deal priced at a net rate-on-line of 15%.”
The transaction was placed with a good mix of investors across different locations and sizes and with different investment strategies. Interestingly, TWCM told us that there was no third-party risk modelling agency involved in the transaction and the investors all had the capability to model and underwrite the transaction themselves.
“The Towers Watson Capital Markets team was very pleased to collaborate with Cincinnati Insurance, a true market leader, on such an innovative structure. The breadth and depth of investor involvement in the transaction clearly demonstrates the acceptance of the private placement catastrophe bond technology that Towers Watson is employing to bring new cedants and new perils to market,” commented Michael Popkin.
“This deal highlights strong support for the cedant and the appeal of diversifying perils for insurance-linked securities investors,” added Rick Miller. “Towers Watson will continue to build its insurance-linked securities platform, and we look forward to bringing other new cedants to market in the future.”
Towers Watson Capital Markets continues to structure and place innovative private cat bond transactions for it clients. This enables smaller primary insurers to access the capital markets with smaller cat bond deals, diversifying their sources of reinsurance and bringing them the benefits of the highly customised cover a cat bond can afford.
Rick Miller told us; “We are having a lot of conversations with cedents that are interested with TWCM’s approach to the capital markets. Our approach is not to replace the 144A cat bond market, but rather to bring new cedents and perils to the markets, so augmenting the breadth of the ILS market for investors.”
Previously TWCM brought both Oak Leaf Re 2011-1 and Oak Leaf Re 2012-1 to market for a Florida homeowner’s specialty insurance company. The TWCM deals are privately placed 144A cat bonds and remain unrated. These types of transactions will continue to become more popular as the desire to access the capital markets for reinsurance cover continues to grow and the frictional costs associated with cat bond issuance continue to fall.
You can find more details on this transaction in our catastrophe bond and ILS Deal Directory.