Everest Re cat bond rating downgraded as industry losses aggregate

by Artemis on October 2, 2017

One of reinsurance firm Everest Re’s in-force catastrophe bond tranches, a $200m Kilimanjaro Re Ltd. (Series 2014-1) Class B tranche of notes, has been downgraded and had its ratings placed on watch due to the aggregation of industry losses from recent hurricane events.

Rating agency Standard & Poor’s said that losses from hurricane Harvey definitely surpass the franchise deductible for this tranche of the Kilimanjaro Re 2015 cat bond and it expects that losses from hurricanes Irma and Maria will too, once their industry losses are clearer.

The catastrophe bond tranche provides Everest Re with retrocessional reinsurance on an annual aggregate basis covering U.S. named storms (including Puerto Rico) and U.S. earthquakes.

S&P has downgraded the rating on the Kilimanjaro Re Ltd. (Series 2014-1) Class B notes to ‘B-(sf)’ from ‘BB-(sf)’ and also placed the rating on CreditWatch Developing.

A developing situation it is, with these Kilimanjaro Re 2014-1 Class B cat bond notes being exposed to all three of the hurricanes that struck in the last few weeks.

Covered losses for the tranche are equal to the Property Claims Services (PCS) issued estimate of insurance and reinsurance industry losses from any qualifying catastrophe event, multiplied by a state specific payout factor.

In the case of hurricane Harvey and its impact on Texas, S&P said that the PCS initial loss estimate for this event is $15.9 billion, although we cannot confirm this as Artemis hasn’t seen the data.

With a reset payout factor of 2% and the majority of the losses said to have occurred in Texas, hurricane Harvey alone therefore gives a qualifying industry loss of somewhere up to $318 million. With a franchise deductible set at $110 million that means this event qualifies and begins aggregating the 2017 hurricane losses under this Kilimanjaro Re cat bond.

Hurricane Irma does not have an estimate as yet, but taking a $25 billion mid-point of some estimates and the Florida payout factor for the Kilimanjaro Re 2014-1 Class B notes of 1.27%, would give another $317 million of qualifying losses, well above the franchise deductible again.

Hurricane Maria though is where this could get interesting, as the payout factor for Puerto Rico post reset is 2.73%. So if hurricane Maria is say a $40 billion industry loss, so below the bottom of AIR’s estimate but above the top end of RMS’, that would give a $1.092 billion loss that qualified under the terms of this cat bond.

The trigger point for the Class B Kilimanjaro Re 2014-1 notes is set at $2 billion, so even using the figures above the qualifying losses would not get to the attachment point.

But this is an annual aggregate cat bond with some time to run until the end of the current risk period in April 2018, so any further landfalling U.S. hurricane activity this season could easily take the losses above the attachment point.

The notes also cover earthquakes across the United States, so any loss event from a quake could also add to the aggregation of losses under the terms of this Everest Re sponsored catastrophe bond.

This tranche of notes is not the riskiest aggregate tranche from Everest Re under the Kilimanjaro Re series of catastrophe bond deals.

The Kilimanjaro II Re Ltd. (Series 2017-1) Class A-1 and Kilimanjaro II Re Ltd. (Series 2017-2) Class A-2 tranches are much more risky, cover hurricanes in Puerto Rico as well as the U.S. mainland, and have a significantly higher expected loss.

The attachment point is roughly similar, but the payout factors for some states are almost double the percentages of the 2014-1 cat bond, hence the same level of industry loss reported by an agency such as PCS can result in a much higher qualifying loss figure.

At the moment, it looks like there Kilimanjaro II Re cat bond tranches would face qualifying losses of over a billion dollars just from hurricanes Harvey and Irma, so it looks like the size of the hurricane Maria loss could be all important as to whether they face a loss or not, as it will be for the 2014-1 notes as well.

The uncertainty surrounding the massive loss estimate range from the risk modelling firms will not be helping ILS investors and cat bond fund managers as they try to establish whether any of the Everest Re sponsored cat bonds will payout.

The 2017 Kilimanjaro II Re cat bonds were not rated, hence no reports from S&P related to them even though they are at greater risk of loss than the 2014-1 tranche of notes.

But the same goes for all of these tranches, as they are all now facing an aggregation of losses from hurricanes Harvey, Irma and Maria, which could threaten some of them directly, or simply erode the retention layer making losses more likely should any further catastrophe events qualify during the remainder of their current risk periods.

S&P said that it could lower the Kilimanjaro Re Series 2014-1 Class B notes rating if there are any further covered loss events or if the loss amounts reported by PCS are higher than anticipated.

At the same time it could raise the rating on the notes if the loss amounts are lower than anticipated or if there are no further covered events between now and the end of the cat bonds risk period.

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