Two Kaith Re – LI Re private cat bonds have maturities extended

by Artemis on February 11, 2016

Two of the LI Re private catastrophe bond deals, issued through reinsurance firm Hannover Re’s segregated accounts vehicle Kaith Re Ltd., have had their maturity dates extended, possibly signalling the potential for losses.

We can’t be certain as to the reason for the extension of the maturity dates of the $5m LI Re (Series 2014-2) and $3.5m LI Re (Series 2015-1), both issued by Kaith Re Ltd., but typically an extension of a maturity date signifies that a qualifying event, or series of events, has occurred and a period for loss development and calculation is required.

Given the size of the two private cat bonds it is assumed that they are collateralised reinsurance transactions (perhaps industry loss warranty (ILW) based), which saw Hannover Re using its Kaith Re vehicle to act as a transformer, private cat bond service provider and issuer.

Given the small size of the two deals it’s also likely that the collateralised reinsurance contracts are being transformed for an ILS fund manager or investor, in order to convert the risks into a more liquid format that can be assumed into a fund or structure with a certain mandate on assets it can hold.

The reinsurance contracts underlying the two LI Re private cat bond issues could have been affected by any number of the recent weather or catastrophe events, or even by events such as the Tianjin explosion, over the course of their coverage. They could also feature aggregate contracts, with a number of events qualifying and a period of loss development required in order for the cedent to determine whether it will make a claim against the bonds.

The LI Re (Series 2014-2) issuance was due to mature yesterday February 10th 2016, but according to a Bermuda Stock Exchange (BSX) notice Kaith Re Ltd., acting in respect of its Segregated Account Li Re, announced that the maturity would be extended to 30th April 2016.

Meanwhile the LI Re (Series 2015-1) issuance was not slated for maturity until the 30th April, but that has now been extended by five months to the 30th September.

With collateralised reinsurance contracts there is always a risk of extension and as a result collateral being held for an extended period of time, particularly if a complex loss or series of smaller losses has the potential to trigger a payment.

If losses look like they could approach the trigger point for a contract or bond the cedent can opt to apply to hold the collateral, through an extension clause, typically paying investors a reduced coupon payment.

As we said, we cannot be 100% certain as to the reason for it in this case, although it does seem most likely, given the dates of the maturities and extensions, that these two LI Re private cat bonds cover a similar reinsurance layer, perhaps aggregate, which is subject to potential losses and as a result the bonds maturities were extended.

We’ll update you should any further details emerge.

You can read all about these private cat bonds and over 400 more catastrophe bond deals issued since 1996 in the Artemis Deal Directory.

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