More details and pricing for the Riverfront Re catastrophe bond

by Artemis on March 14, 2014

We now have further information and pricing details on the latest catastrophe bond to hit the market, the $95m Riverfront Re Ltd. (Series 2014-1) from first time cat bond sponsor U.S. property casualty insurer Great American Insurance Group.

The Riverfront Re cat bond transaction launched earlier this week but at the time only limited details were available to Artemis. Now, thanks to the pre-sale report from Standard & Poor’s and discussions with market contacts we can provide more information, including the fact that this is another cat bond containing an element of unmodelled risk, as well as details of the launch price guidance.

Riverfront Re Ltd. is a Bermuda domiciled special purpose insurer which will seek to issue a single tranche of Series 2014-1 notes to collateralize reinsurance agreements between itself and the sponsor. The Series 2014-1 tranche of notes is currently sized at $95m.

With the issuance of Riverfront Re Ltd. Great American Insurance is seeking a multi-year source of fully-collateralized reinsurance protection against losses from named storms, earthquakes (including fire following), severe thunderstorms, and winter storms on a per-occurrence basis.

The Riverfront Re cat bond covers losses suffered by Great American Insurance and named subsidiaries to subject business across the U.S. and Canada, the details show. Interestingly the named storm coverage also extends to Canada, so protecting the sponsor against losses from a hurricane which travels north and becomes a strong extratropical storm.

The risk period for the protection provided by Riverfront Re will be for almost three years with maturity of the cat bond due at the end of December 2016. This means the reinsurance protection covers three U.S. hurricane seasons.

The covered business consists of property lines insured or assumed by Great American Insurance and subsidiaries, including Great American Insurance Co.; American Empire Surplus Lines Insurance Co.; American Empire Insurance Co.; Mid-Continent Casualty Co.; Mid-Continent Assurance Co.; Mid-Continent Excess and Surplus Insurance Co., Mid-Continent Specialty Insurance Services Inc.; and Oklahoma Surety Co.

The covered area for named storms (so tropical storms and hurricanes) are the states of Texas, Louisiana, Mississippi, Alabama, Florida, Georgia, South Carolina, North Carolina, Virginia, West Virginia, Pennsylvania, New York, Vermont, Maine, New Hampshire, Massachusetts, Rhode Island, Connecticut, New Jersey, Delaware, Maryland, Hawaii, District of Columbia, and Canada.

The covered area for the remaining perils, earthquakes (including fire following), severe thunderstorms, and winter storms, is for all 50 U.S. states, the District of Columbia, and Canada.

The Riverfront Re cat bond transaction is using catastrophe designation from Property Claim Services (PCS) for severe thunderstorm and winters storm losses. For these perils to qualify as covered events the catastrophe event must be assigned a catastrophe code by PCS, which would require the event to have caused an estimated $25m or more of insurance industry losses. Named storms are designated by the National Hurricane Centre and earthquakes by the USGS.

The Riverfront Re catastrophe bond features an indemnity and per-occurrence trigger, with the attachment point at $100m of losses to the sponsor and up to an exhaustion point of $200m. The covered layer under the cat bond protection is $100m in size but the sponsor will retain a 5% share of the ultimate net losses from any covered events (hence the $95m protection).

The attachment probability for the notes is 1.99%, the exhaustion probability is 0.61% and the expected loss is 1.1%.

The majority of the expected losses within the Riverfront Re cat bond are from named storms, we understand. The U.S. states contributing the largest portion of the expected losses are Florida, New York, Massachusetts, Connecticut and Texas, predominantly from named storm risk.

Parties involved in bringing the Riverfront Re catastrophe bond to market include Aon Benfield Securities and Goldman Sachs acting as joint structuring agents and bookrunners and RMS acting as risk modeller for the deal.

Once again this new cat bond contains an element of unmodelled risk, according to Standard & Poor’s, for example the covered business includes equine mortality risks and trucking risks which are unmodelled. It is also worth noting that the cat bond covers predominantly commercial exposures and includes agricultural risks and inland marine which can be harder to model losses for.

Based on modelling of historical loss events, RMS found that only one hurricane event would have caused a loss to holders of the Riverfront Re cat bond notes. The ‘Northeast Clipper’ storm of 1938 generated an ultimate net loss of $122.6m which would have eroded some of the investors principal. The next largest events were the 1811 New Madrid Earthquake and the 1928 Okeechobee Hurricane, which resulted in ultimate net losses of $84.2m and $69.8m, respectively.

The $95m tranche of Series 2014-1 Riverside Re Ltd. cat bond notes are being marketed to investors with a coupon guide range of 4.25% to 5%, Artemis understands.

It is expected that the Riverfront Re cat bond will close on the 31st March, with the first risk period beginning on the 1st April 2014, which should place its issuance into Q1 2014’s numbers.

You can read all about the Riverfront Re Ltd. (Series 2014-1) catastrophe bond in the Artemis Deal Directory. We will update you as the deal comes to market.

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