VenTerra Re Ltd. (Series 2013-1)

VenTerra Re Ltd., a Bermuda domiciled SPI, will seek to issue a single tranche of Series 2013-1 notes in this cat bond issuance with a preliminary size of $200m.

The coverage afforded by the notes benefit QBE Insurance Group subsidiaries and affiliates, but we understand that this is being achieved through a reinsurance agreement with QBE’s captive reinsurer Equator Reinsurance Ltd.

The fully-collateralized, capital market backed, reinsurance protection gained through the VenTerra Re cat bond will cover QBE and subsidiaries against certain U.S. earthquake, Australian cyclones and Australian earthquake events for a three-year period. The reinsurance coverage provided will be on an indemnity and per-occurrence basis, Artemis understands.

The notes being issued by VenTerra Re will provide broad cover for these perils, according to S&P, as the covered perils for earthquakes includes; related earth shake, fire, sprinkler leakage, volcanic disturbance or eruption, tsunami, and flooding due to dam or levy ruptures, and the coverage for tropical cyclones includes; ensuing damage caused by related windstorm, rainstorm, hailstorm, tornado, flood, and storm surge.

The transaction covers a number of QBE Insurance Group subsidiaries, but the transaction is being facilitated through QBE’s captive reinsurer Equator Reinsurances Ltd. Equator Re will act as the agent for the companies covered by the deal for the purposes of sending and receiving notices required under the reinsurance agreements, as well as for remitting or receiving any amounts due to or from VenTerra Re.

That means that Equator Re will make premium payments due to VenTerra Re and will funnel the premiums from each covered subsidiary. Equator Re will be responsible for paying funds from any subsidiary that does not make a payment as well.

S&P notes that the trigger, which is indemnity based, is more narrowly defined than many recent cat bonds it has assessed. In the case of VenTerra Re, this means that the trigger cannot be interpreted to aggregate earthquakes occurring more than a week apart.

In fact the trigger also include a parametric element in it as only earthquake events of a certain intensity or greater can qualify as a covered event for ground shake under the terms of the deal.

S&P explains;

“An earthquake is reported by the USGS and identified in the U.S. earthquake event report available 30 calendar days after its occurrence time if it caused ground shaking in the covered area with instrumental intensity of VI or greater. An earthquake in Australia is reported by the USGS–or if not the USGS, Geoscience Australia–and identified in the Australian earthquake event report available 30 calendar days after the occurrence if it caused ground shaking in the covered area with instrumental intensity of VI or greater.

To clarify, “ground shaking in the covered area” means that, if a quake happens and does not cause shaking inside the covered area but a tsunami were to hit the covered area, this would be a covered event. “Instrumental intensity of VI or greater,” on the Modified Mercalli Intensity Scale (MMI), means “felt by all, many frightened. Some heavy furniture moved; a few instances of fallen plaster. Damage slight.” This is the first level on the scale where damage starts to occur.

If any earthquake directly or indirectly causes losses over a period of greater than seven calendar days, the ceding insurer may divide such earthquake into two or more loss occurrences provided that no two seven calendar-day periods may overlap.

An Australian cyclone is a storm or storm system that is, or at any time was, named by the Australian Bureau of Meteorology (BOM) or its successor to be a tropical cyclone at any time.”

The primary risk for the VenTerra Re cat bond is U.S. earthquake, the Australian perils make up just 27% of the modelled risk. The exposures in Australia are fairly widespread which means that any missing data should not have a major bearing on the deal, according to S&P. Most of the exposure in the VenTerra Re cat bond is to personal lines and multifamily dwellings.

The covered area is all 50 states and the District of Columbia for U.S. earthquake risk; for Australian earthquakes and cyclones, the covered area is the entire Commonwealth of Australia.

Based on historical loss analysis undertaken by RMS only the 1906 San Francisco earthquake would have triggered the cat bond. The estimated loss is 59% of the layer from that event. Based on the definition of U.S. earthquakes used in the deal, the 1811-1812 New Madrid quakes would not have been a triggering event. The two most significant events in Australia were the 1954 Adelaide earthquake and 1918 Mackay cyclone. The modeled losses from these events were A$861 million and A$662 million, respectively.

S&P raise a number of other interesting points about the VenTerra Re Ltd. catastrophe bond:

• The deal covers volcanic eruptions triggered by earthquakes, but the risk modeller RMS does not model losses for volcanic eruption. Also increased seismic activity can help scientists predict volcanic eruptions and where they occur they have the potential to create large insured losses. S&P notes that; “A large volcanic eruption is likely to result in complicated coverage questions in ascertaining whether the earth movement caused the eruption and could lead to coverage by the noteholders.”
• Tsunami caused by earthquake is also covered, again these are not a modelled peril and they could be caused by an earthquake which does not create enough ground shake to trigger the cat bond, but the tsunami itself could cause it to trigger.
• Interestingly, S&P says that large portions of the covered business information is not as detailed as in other cat bond transactions. Large portions of the data are coded as “unknown” or “other”, which S&P says is in line with industry practice in Australia.
• Modelling for Australian perils is generally not as complete as for U.S., so for this cat bond the Australian earthquake and tropical cyclone models do not include factors such as demand surge, fire following or sprinkler leakage, which are modelled for the U.S. earthquake risk. However, S&P noted that these should generally be smaller losses in Australia than in the U.S., as Australia is not as prone to large catastrophes and is less densely populated than the U.S.

The single tranche of notes have an attachment point of USD$1.5 billion for U.S. earthquake risks and AUD$4.25 billion for Australian cyclone and earthquake risks. The exhaustion points are USD$1.75 billion for U.S. earthquakes and AUD$4.5 billion for the Australian perils.

The attachment probability for the notes is 1.52%, the expected loss is 1.35% and the exhaustion probability is 1.21%. The notes are said to be being offered with price guidance of 3.75% to 4.5%.

Update 1: The single tranche of notes offerd by VenTerra Re Ltd. grew by 25% to finally offer $250m of notes to investors and reinsurance protection to QBE.

At the same time the pricing dropped on the transaction, from the original range of 3.75% to 4.5%, the pricing finally settled at 3.75%, approximately 10% down from the mid-point of the guidance range.