For the second time Swiss insurer Zurich Insurance Group has increased the attachment point of its Lakeside Re III Ltd. most recent catastrophe bond at the transactions annual reset on 1st January, to adjust for a change to its exposures.
The $270m Lakeside Re III cat bond provides Zurich with fully-collateralized reinsurance protection for a $300m layer of its reinsurance program, after a 10% co-participation. The cat bond covers Zurich for losses suffered from earthquakes in the U.S. and Canada, specifically Californian, Pacific Northwest and New Madrid fault earthquake risks.
Lakeside Re III features a trigger based on annual aggregate and indemnity (ultimate net loss) losses and covers Zurich over a three-year risk period to 8th January 2016. At the end of each annual risk period the deal needs to be reset, to adjust for changes to the risk profile of the covered business and Zurich’s property insurance exposures.
For the second year running, the attachment point for Lakeside Re III has been increased by Zurich at the reset. The attachment point has to be reset to take into account any adjustments to exposure, but while maintaining an expected loss of 2.04%.
When the Lakeside Re III cat bond was launched at the end of 2012 the attachment point was set as $650m of losses to Zurich. At the January 2014 reset this was lifted to $696m of losses, as the insurer adjusted its risk exposure.
Again, at the January 2015 reset the attachment point has been lifted again, this time to $777m of losses, which then puts the exhaustion point at $1.077 billion of loss to Zurich. The change is based on updated exposure data and a stated reinsurance report, while maintaining the expected loss of the reinsurance layer provided by the cat bond at 2.04%.
For investors the deal is essentially just as risky as before, as signified by the static expected loss for the layer of Zurich’s reinsurance program. The adjusted attachment point simply infers a higher exposure, meaning that the deal triggers when more losses occur as Zurich has more exposed business in the covered area this year.
This would also suggest that Zurich is growing its premiums underwritten in U.S. and Canadian property insurance in regions exposed to earthquakes.
It should be noted that this is not what has become known as a flexible reset feature, where a cat bond can be moved up and down within a reinsurance tower. No change to the investors coupon will have been made here, rather the increase in attachment point simply reflects an increase in exposure while maintaining the expected loss of the cat bond notes.
You can see where the Lakeside Re III cat bond fits in Zurich’s reinsurance program after the reset in the graphic below. The asterisk in the $300m layer of Zurich’s NA Earthquake regional catastrophe treaty.