Ariel Re targets even lower pricing with new Titania Re cat bond
In a sign that the catastrophe bond market has indeed found an equilibrium and that pricing levels have potentially peaked, at least for issuers with strong underwriting track records, global reinsurance company Ariel Re is seeking to secure even lower pricing for its latest Titania Re Ltd. (Series 2023-1) cat bond.
We reported just last week that the cat bond market is finding a pricing equilibrium, with spreads stabilising albeit at higher levels.
Ariel Re’s experience with its latest cat bond seems to support that thesis and perhaps even points to a greater level of capital in the market since the end of year renewals, which may help to bring prices down slightly from their recent peak.
This is Ariel Re’s third Titania Re cat bond deal and when it was launched to investors at the end of January, the reinsurance firm was seeking $115 million of multi-peril industry-loss triggered retrocession from the transaction.
Then, as we later reported, we learned that Ariel Re’s appetite had grown somewhat, with the target size increased to up to $125 million across the two tranches of cat bond notes that Titania Re will issue, but at the same time the pricing guidance had been reduced, suggesting that each tranche would now be priced either at or below the initial guidance level.
Now, we’ve learned that the time-line for this Titania Re cat bond has been pushed out a little further, with Ariel Re looking to secure even lower pricing for the issuance and the guidance having been reduced even further for each tranche of notes.
Which now looks as if Ariel Re could secure its new cat bond priced below the low-end of the initial guidance range, a feat that we haven’t seen since hurricane Ian.
For full details on the cat bond coverage visit the Titania Re 2023-1 Deal Directory entry, below we’ll largely focus on the pricing shift.
The Class A tranche of Titania Re Series 2023-1 cat bond notes were first marketed at $65 million in size, but that was raised to up to $75 million, which is where the target still sits. These notes will provide annual aggregate cover across both named storm and earthquake perils.
The Class A notes, which have an initial base expected loss of 2.59%, were first offered to cat bond investors with spread guidance of 13% to 13.75%, but that price guidance was lowered at first to 12.75% to 13%, and now has been lowered again to between 12.25% and 12.75%.
For the Class A notes, that represents a -5% shift in pricing from the initial mid-point, even if they price at the top-end of the now twice lowered guidance, so 12.75%. Should they price lower, it would represent a near -7% shift if they closed at the new lower mid-point of 12.5%.
Meanwhile, the Class B tranche are still $50 million in size, set to provide per-occurrence named storm only protection over the same three-year term.
The Class B notes, which have an initial base expected loss of 3.82%, were first offered to investors with spread guidance in a range from 13.5% to 14.25%, but that guidance was first lowered and narrowed to 13.25% to 13.5%, and has now been reduced again, marketed today with a range of 12.75% to 13.25%.
For the Class B notes, that represents a possible -5% shift in pricing should they be finalised at the upper-end of the latest guidance, at 13.25%, or a -7% shift if they settle further down at the new mid-point of 13%.
These aren’t the most dramatic shifts in pricing seen. Regularly, pre-hurricane Ian, we’d see cat bond issuances pricing down 10% or more during their marketing.
It’s also hard to know whether the pricing was perhaps set a little too high from the off with this new cat bond, or whether the cat bond investment community just has more cash and newly raised funds available, while their valuations have continued to recover, giving Ariel Re a great opportunity to capitalise on slightly improved issuer market conditions.
Either way, what’s important is that this does suggest a more stable catastrophe bond marketplace equilibrium, as well as the cat bond market delivering on sponsor needs.
This should be encouraging for sponsors looking at the market and considering issuance in 2023, as we suspect conditions may become even more conducive, from a pricing point of view, as capital levels build.
However, sponsors should not expect a return to pricing pre-Ian, as the cat bond market is determined to hold onto much of the gains made and investors continue to demand a level of pricing that can deliver sustainable returns, over the long-term.
So we don’t believe the market is going to soften considerably and we see this as more of a balancing of supply and demand, as well as the effects of greater clarity over Ian losses emerging and providing more confidence to investment managers in their portfolio valuations.
It’s going to be interesting to see what Ariel Re prioritises with this its latest cat bond, as it appears so far from this process that strong execution, in terms of pricing, could be the main focus over and above an increase in size.
We’re told the pricing and settlement dates have been pushed back a few days, to allow for this second update to and lowering of price guidance.
You can read all about this new Titania Re Ltd. (Series 2023-1) catastrophe bond from Ariel Re, as well as details on over 900 other cat bond transactions in the extensive Artemis Deal Directory.