Riverfront Re Ltd. (Series 2014-1)

Great American Insurance Group is a subsidiary of financial services firm American Financial Group. This is the insurers first visit to the capital markets to issue a catastrophe bond.

Riverfront Re Ltd. is a Bermuda domiciled special purpose insurer registered in late-January for the purpose of issuing series of catastrophe bond notes. In this first issuance for Great American Insurance, Riverfront Re Ltd. is proposing the issue of a single $95m Series 2014-1 tranche of notes.

The notes will provide Great American and subsidiaries with a multi-year source of fully-collateralized reinsurance protection against the perils of named storms, earthquakes including fire following, severe thunderstorms and winter storms in the U.S. and Canada.

The protection runs for almost three years with maturity of the Riverfront Re bonds due at the end of December 2016.

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.

Ratings agency Standard & Poor’s said that the Riverfront Re cat bond will cover Great American Insurance and its named subsidiaries losses on a per-occurrence basis from an attachment point of $100m 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 ultimate cedents, or beneficiaries of the reinsurance protection, will be 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, according to S&P. Great American Insurance will act as agent of the ceding companies and will be responsible for sending and receiving notices of losses and receiving or remitting payments.

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.

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%.

Update 1:

Artemis understands that guidance has now been lowered and tightened and the notes are now being offered with a price range of 4% to 4.25%.

For Great American Insurance, should the notes price at the bottom of the new range at 4%, it would represent a saving of around 13.5% from the mid-point of initial guidance, making the transaction particularly effective on a cost basis.

Update 2:

The Riverfront Re cat bond finally priced at the bottom of the reduced range with a coupon to investors of 4% (400bps) above the collateral investment yield.