United’s (UPC) new Armor Re II cat bond halved at higher pricing

The latest catastrophe bond to be sponsored by United Insurance Holdings (UPC Insurance) has halved in size, we’re told, as pricing expectations moved to the top-end of expectation, leading to a tranche being pulled and the insurer likely opting to place the remainder of the cat bond in another form.

United (UPC)’s latest catastrophe bond, Armor Re II Ltd. (Series 2019-1), launched to the market in late April and was targeting $200 million of collateralized reinsurance coverage for the insurer, in a two tranche issuance.

We’re told that only the Class A, less risky, of the two layers of risk has survived, resulting in a $100 million issuance.

The deal launched with United (UPC) seeking $200 million of reinsurance cascading protection against losses from U.S. named storm and earthquake events, across a three-year term, indemnity trigger and per-occurrence basis.

The two tranches were slated to sit on top of United’s inuring reinsurance layers, cascading downwards as those were eroded by any losses.

The deal launched marketing a $100 million Class A tranche of Series 2019-1 notes with an initial expected loss of 1.64% and a $100 million Class B tranche with an initial expected loss of 2.08%.

The Class A tranche of notes remains at $100 million in size, we understand, but the pricing has now been fixed at the top-end of the marketed 5.4% to 5.9% range, so settling at 5.9% and reflecting a high multiple for this layer (compared to recent years).

It’s this pricing that has likely resulted in the disappearance of the $100 million Class B layer of notes, sources said.

United (UPC) is a shrewd reinsurance buyer and has plenty of options available to it. The company could be placing this tranche in the traditional reinsurance market, as a private ILS deal with a club of ILS funds and investors, or even transferring it all to one larger ILS player.

We’d imagine what United is doing is securing that layer on a one-year basis right now, to see how pricing moves over the coming year, rather than getting locked in on a three-year term at higher rates.

Had the multiple been similar, it would have taken the pricing for the Class B notes above the marketed range, which may have been too much for United to stomach.

Things have clearly changed rapidly though, as only a few days ago CEO John Forney said he expected the cat bond to still be around $200 million in size.

Mid-year reinsurance renewal dynamics are fluid this year.

But for large buyers of reinsurance and ILS capacity, such as United (UPC), the availability of options to secure coverage from different sources means they can do what they can to improve their pricing, by changing their placements and moving risk around to different capacity sources, as pricing and terms suit.

Often these big reinsurance buyers bring their cat bonds to market alongside their traditional placements, to do exactly that, ensuring they can achieve the best execution possible. United (UPC) is in the market for its remaining $800 million of catastrophe reinsurance limit right now, which looks like it just jumped up to $900 million (although we suspect the extra $100 million has already been secured).

So, as it stands, the Armor Re II 2019-1 catastrophe bond from United Insurance Holdings looks set to only be a $100 million deal, having halved in size as this riskier tranche was removed.

We understand the issuance of these Armor Re II Ltd. (Series 2019-1) cat bond notes will complete next week and you can read all about this and every other catastrophe bond in the Artemis Deal Directory.

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