Further details on SCOR’s Atlas IX Capital mortality cat bond

Additional details are now available on the first mortality-linked catastrophe bond of the year. Last week we covered the launch of Atlas IX Capital Limited (Series 2013-1) an extreme mortality insurance-linked security sponsored by French reinsurer SCOR to provide it with retrocessional reinsurance protection.

Now ratings agency Standard & Poor’s has published a pre-sale report on the notes to be issued and assigned preliminary ratings which has made further details on the structure of this ILS transaction available.

Atlas IX Capital, a recently registered Irish special purpose vehicle, has been established for the sole purpose of issuing series of catastrophe bond notes to collateralize risk transfer contracts with SCOR. This first transaction sees two tranches of notes issued, which will collateralize a risk transfer contract providing the cedent SCOR Global Life SE with protection for losses caused by extreme mortality on a two-year aggregate basis for the Class A and B notes over a six-year period.

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

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):

Atlas IX Capital Ltd. mortality catastrophe bond risk periods - Source: Standard & Poor's pre-sale report

S&P explain 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.

The Atlas IX Capital transaction is split into two tranches. The 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%, an exhaustion probability of 0.46% and offering a coupon to investors in the range of 2.5% to 3.25%. This tranche triggers at a mortality index level of 104% up to the exhaustion which is at 107%.

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%, an exhaustion probability of 0.75% and offering investors a coupon return in the range of 3.25% to 4%. This tranche triggers at an index level of 102% up to exhaustion at 104%. The Class B tranche of notes is therefore a little more risky than Class A.

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.

The proceeds from the sale of the Atlas IX Capital notes will be invested in EBRD notes and invested in two separate collateral accounts.

Aon Benfield Securities are the sole structuring agent on this transaction and also a joint-bookrunner, alongside BNP Paribas and Natixis.

Standard & Poor’s Ratings Services assigned its ‘BB+ (sf)’ and ‘BB (sf)’ preliminary issue credit ratings to the series 2013-1 class A and B notes, respectively, to be issued by Atlas IX Capital Ltd.

We hope the above information provides a little more insight into this mortality catastrophe bond transaction from SCOR. You can read all about Atlas IX Capital Limited (Series 2013-1) in our Deal Directory. The pricing should be set for this transaction by early next week and we’ll update you when we hear more about the pricing and size of this deal.