Atlas IX Capital Limited (Series 2013-1)

This is the first catastrophe bond from SCOR which covers mortality risks, its other transactions having covered natural catastrophes. SCOR has however secured mortality protection via retrocessional reinsurance and also a mortality swap in the past.

The transaction will seek to provide sponsor SCOR Global Life SE with a multi-year source of extreme mortality protection, which will provide it with a fully-collateralized, capital markets backed source of protection against mortality events. The types of events which could cause excess mortality on such a scale to threaten a mortality cat bond like this would likely be pandemics, such as influenza outbreaks, earthquakes causing large loss of life, pandemics, disease outbreaks, terrorist events, nuclear accidents or an outbreak of war.

The Atlas IX Capital mortality bond is offering two tranches of notes to investors and hopes to raise at least $125m of retrocessional reinsurance protection for SCOR. The transaction will provide SCOR with extreme mortality protection over roughly a 5 year period, with a risk period that runs from the start of 2013 through to the end of 2018.

Atlas IX Capital will protect SCOR against extreme mortality events across the U.S. and the District of Colombia. The transaction will use a mortality index trigger based on data from the U.S. CDC (Center for Disease Control). The index will be weighted by both age and gender.

A Class A tranche of notes is being marketed with a preliminary size of $75m, with an attachment probability of 0.74%, an expected loss of 0.58% and offering a coupon in the range of 2.5% to 3.25%. This tranche triggers at an index level of 104% we are told.

The second, Class B, tranche of notes is marketed at $50m in size, with an attachment probability of 1.16%, an expected loss of 0.92% and offering investors a coupon return in the range of 3.25% to 4%. This tranche triggers at an index level of 102%. The Class B tranche is a little more risky than Class A.

To determine if the notes are triggered by an extreme mortality event, an index will be created utilising the CDC data on the mortality event and the calculation agent will establish whether the number of mortalities is above the trigger point or not.

Aon Benfield Securities are structuring this transaction for SCOR and also a joint-bookrunner, alongside BNP Paribas and Natixis. RMS are providing risk modelling and calculation services.

Risk Management Solutions (RMS) is risk modelling and calculation agent for this Atlas IX Capital mortality bond. RMS used a number of its models when assessing the risk and evaluating the transaction, including the RMS Longevity Model, RMS Infectious Disease Model, RMS U.S. Earthquake Casualty Model, RMS Probabilistic Terrorism Model Version and RMS Statistically Modeled Perils (RMS Residual Risk Model).

The deal does cover some remote unmodeled risks, such as the outbreak of an epidemic or the occurrence of a major tsunami. S&P also noted that there is uncertainty in the modelling as it is difficult to compare current mortality rates to historical rates due to medical advances and changes in lifestyle. A significant amount of the risk in this deal originates from the infectious disease model.

RMS performed risk analysis by reconstructing historical events to see how they would impact the Atlas IX Capital mortality bond notes. RMS concluded that only a recurrence of the 1918 flu pandemic caused by a virus would result in complete losses of principal on both the Class A and B notes. Conversely, in a bacterial scenario, RMS found that no losses would be reported on Class A while a principal reduction of 99.4% would occur on Class B.

Over the last 100 years even events such as the peak of AIDS deaths in 1987 and the Sept 11 2001 terrorist attacks would not have triggered a loss under either of the Atlas IX Capital tranches. S&P believes that the biggest risks to this transaction are man-made catastrophes, such as a nuclear, chemical, or biological war or terrorist attack; a major natural catastrophe; or a substantial pandemic which has very limited vaccine or known treatment.

The Atlas IX Capital mortality catastrophe bond issuance includes two tranches of notes and hopes to raise at least $125m of retrocessional reinsurance protection for SCOR. The risk period is from the beginning of 2013 to the end of 2018, so six years, and within that period there are five overlapping two-year risk periods during which mortality losses can aggregate towards the trigger points.

That’s an unusual way to structure a deal, but it will ensure that a single extreme mortality event from the start of 2014 onwards will always be contained within two of the two-year overlapping risk periods. This will make the chance of the bond being triggered very slightly higher we’d assume, but as a structural feature it improves the protection for the sponsor considerably.

Standard & Poor’s provide a diagram of the risk period and further explain this feature (below):

S&P explained in the pre-sale report:

Within a six-year risk period, there are five different measurement periods for which a loss can occur, as illustrated above. A principal reduction can occur only after the first measurement period has elapsed, that is, after the first two calendar years of a risk period have elapsed. If there is a loss in two adjacent measurement periods, the loss in the later measurement period will only count to the extent that it exceeds the immediately preceding measurement period.

Investors who hold the notes will be at risk of an increase in age and gender-weighted mortality rates exceeding those specified percentages of the reference mortality index values across the United States and District of Colombia. So if the mortality experience hits 102% the Class B tranche would be triggered, should it rise to 104% or higher the Class B notes collateral would be exhausted and the Class A noteholders would begin to be affected.

The transaction uses a mortality index trigger based on data from the U.S. CDC (Center for Disease Control). To determine if the notes are triggered by an extreme mortality event, the calculation agent will use CDC data on the mortality event to establish whether the number of mortalities is above the trigger point (percentage) or not.

Risk Management Solutions (RMS) is risk modelling and calculation agent for this Atlas IX Capital mortality bond. RMS used a number of its models when assessing the risk and evaluating the transaction, including the RMS Longevity Model, RMS Infectious Disease Model, RMS U.S. Earthquake Casualty Model, RMS Probabilistic Terrorism Model Version and RMS Statistically Modeled Perils (RMS Residual Risk Model).

In its assessment of the transaction Standard & Poor’s said that the underlying mortality risk exposure shows strong diversification in terms of age and gender, an important fact in the deals rating. S&P also noted that response to pandemic risk events has improved since it first rated a mortality bond in 2003 and developments in scientific areas such as vaccine research has also moved forwards.

The deal does cover some remote unmodeled risks, such as the outbreak of an epidemic or the occurrence of a major tsunami. S&P also noted that there is uncertainty in the modelling as it is difficult to compare current mortality rates to historical rates due to medical advances and changes in lifestyle. A significant amount of the risk in this deal originates from the infectious disease model.

RMS performed risk analysis by reconstructing historical events to see how they would impact the Atlas IX Capital mortality bond notes. RMS concluded that only a recurrence of the 1918 flu pandemic caused by a virus would result in complete losses of principal on both the Class A and B notes. Conversely, in a bacterial scenario, RMS found that no losses would be reported on Class A while a principal reduction of 99.4% would occur on Class B.

Over the last 100 years even events such as the peak of AIDS deaths in 1987 and the Sept 11 2001 terrorist attacks would not have triggered a loss under either of the Atlas IX Capital tranches. S&P believes that the biggest risks to this transaction are man-made catastrophes, such as a nuclear, chemical, or biological war or terrorist attack; a major natural catastrophe; or a substantial pandemic which has very limited vaccine or known treatment.

On the construction of the mortality index and how the calculation agent will establish a mortality index value (MIV) Standard & Poor’s said:

The MIV is defined on a rolling two-year period, and the probability of a loss attaching and the magnitude of the loss in principal depend on the extent to which the MIV for measurement period (that is, two consecutive years) exceeds the attachment point for the notes. Index values corresponding to future measurement periods are measured against the reference index value starting from the 2012 calendar year for the 50 states of the U.S. and District of Columbia only. Adjustments are applied for changes in mortality over the risk period. The MIV is constructed using published population mortality rates from The U.S. Centers for Disease Control and Prevention, weighted by age and gender. The age and gender weights for the notes are fixed at inception and do not change during the risk period. The combined reduction in original principal for each payment date is the sum of loss percentages across all measurement periods in a risk period in the covered area for each class. This cannot exceed 100%. On a given payment date, the principal reduction amount is equal to the original principal amount, reduced by any amount already tendered, multiplied by the change in the combined principal reduction factor from the previous payment date.

Update: The Atlas IX Capital mortality catastrophe bond grew in size by 40% to $175m while marketing. At the same time the pricing dropped and narrowed.

The Class A tranche of notes launched with a preliminary size of $75m and offered investors a coupon in the range of 2.5% to 3.25%. This tranche remains at $75m in size and the price guidance has fallen to the bottom end of that range with expectations that it will close offering a 2.5% return to investors.

The second, Class B, tranche of notes launched with a preliminary size of $50m and offering investors a coupon return in the range of 3.25% to 4%. This tranche has doubled in size to now offer $100m of notes and the price guidance has dropped to below the original range and narrowed to now offer an expected coupon in the range of 3% to 3.25%.

Update 2: In an interesting turn of events, and slightly unsual for a cat bond issuance, this deal has now shrunk slightly and one tranche of notes has been pulled completely.

The lower risk, Class A tranche of notes, has been pulled entirely and is no longer being offered to investors.

The Class B tranche, which is higher risk and triggers at a mortality index value of 102% and as we wrote on Monday were offering a coupon of 3% to 3.25% for the upsized $100m of notes on offer has now been upsized even more. This tranche now offers $150m of notes, we understand, but the coupon guidance has been raised a little to 3.25% to 3.5%.

So the transaction has shrunk to $150m from the $175m of notes which we last updated this entry with.

We can’t be certain but it does look like investor interest in the lower risk, lower return, Class A notes has not been sufficient to get this tranche to market. For the Class B notes it appears that interest from investors remains but they have forced the coupon up a little.

Update 3: The single tranche of Series 2013-1 Class B notes issued by Atlas IX Capital Ltd. ended up at $180m in size, meaning that it eventually secured all of the capacity it required but at the riskier, lower trigger tranche level (the tranche that was pulled from the issuance was lower risk, with a higher trigger). Pricing on the notes finished at 3.25%, which is the bottom of the range this tranche launched with.

Gilles Meyer, Chief Executive Officer of SCOR Global Life, commented; ”The Series 2013-1 note offering of Atlas IX has created tremendous interest, enabling SCOR Global Life to secure substantial protection against its increased pandemic exposure following the strong growth of its portfolio, with the acquisition of Generali U.S. being the latest example. In combination with the innovation of an exceptionally low attachment point, the secured protection represents a very cost efficient risk mitigation tool.”

Denis Kessler, Chairman & Chief Executive Officer of SCOR, said; “Series 2013-1 of Atlas IX represents a first step in the implementation of SCOR’s recently released new three-year strategic plan “Optimal Dynamics”. The secured pandemic protection will in particular address two of the cornerstones of the SCOR group – a controlled risk appetite and a robust capital shield. In addition the transaction underlines the Group’s aim to leverage the increasing convergence between reinsurance and capital markets.”