Kilimanjaro Re Ltd. (Series 2014-1)

Everest Re is looking to secure a four-year source of fully-collateralized retrocessional reinsurance protection through the issuance of two tranches of cat bond notes from Bermuda-based special purpose reinsurer Kilimanjaro Re Limited. At launch the cat bond is being marketed as a $250m transaction split evenly between the two tranches of notes, Artemis understands.

This 2014-1 cat bond from Kilimanjaro Re will provide Everest Re with per-occurrence and annual aggregate U.S. named storm protection and aggregate U.S. earthquake protection as well. Protection will be afforded on an industry loss basis, using a PCS index weighted by territory for both the per-occurrence and aggregate for each peril.

The $125m Class A tranche of notes is targeting per-occurrence coverage for U.S. named storms in the states of Alabama, Florida, Georgia, Louisiana, Mississippi, North Carolina and South Carolina, using a weighted PCS industry loss trigger. This tranche of notes has an attachment probability of 2.24%, an exhaustion probability of 1.14% and an expected loss of 1.6%, we understand. The attachment point for the Class A notes is at an industry index level of $1.4 billion while the exhaustion is at an industry index level of $2.15 billion.

The $125m Class B notes target annual aggregate protection for U.S. named storms across a wider area of all U.S. Gulf and East coast states as well as aggregate earthquake protection across all the most exposed states in the U.S. This tranche has an attachment probability of 2.18%, an exhaustion probability of 0.94% and an expected loss of 1.46%. The attachment point is set at an industry index level of $2.15 billion while this tranche exhausts at an index level of $2.9 billion. It is understood that the Class B tranche features a franchise deductible of $110m per event.

Interestingly, rating agency Standard & Poor’s said that; “If PCS fails to supply the necessary information and a replacement is found, the epicenter of an earthquake does not have to be within the covered area, but if an earthquake results in spectral acceleration of at least 0.084g in the covered area, then losses related to this earthquake will be covered.”

The Class A notes are predominantly exposed to Florida for named storms. Florida contributes 92.5% of the expected losses for this tranche of notes, which as good as makes the tranche a Florida wind cat bond.

The Class B notes are more evenly exposed, with 73.8% of the tranches expected losses attributable to named storms, 26.5% being Florida wind, 12.2% being Texas, 5.6% New York and 4% Massachusetts. Of the remaining 26.2% of expected losses which makes up the earthquake exposure in the Class B tranche of notes, 18.7% is California quake risk.

As a result of this exposure base the main risk facing investors in the Kilimanjaro Re cat bond appears to be from a Florida category 4 or 5 hurricane.

S&P also noted that based on risk modeller AIR’s analysis there has been one named storm event, the unnamed hurricane of 1926 that made landfall in Florida and Alabama, that would have resulted in a lost to the class A note holders. Losses from this event would have resulted in a full loss of principal. The next three most-damaging events were the 1928 unnamed storm that made landfall in Florida, 1992’s Hurricane Andrew, and the unnamed storm of 1947 that made landfall in Florida and Louisiana. Modeled losses from these events were $1.32 billion, $1.27 billion, and $1.20 billion, respectively.

For the Class B notes, only the San Francisco earthquake of 1906 would have resulted in a loss to the class B note holders. The modeled loss from this event would have resulted in an 81% principal reduction. The next three most-damaging event years were 2005 (hurricanes Katrina, Rita, and Wilma) with $1.99 billion in estimated losses, 1926 (one unnamed hurricane) with $1.61 billion, and 1886 (Charleston S.C. earthquake) with $1.15 billion.

S&P also note that the AIR U.S. Hurricane Model does not model the probability of losses resulting from tropical storms that at no point are classified as a hurricane, hurricanes that degrade to tropical storm force and subsequently make landfall in the U.S. as tropical storms, or storms that never make landfall in the U.S. that fail to cause winds of greater than or equal to 74 miles per hour over any part of the U.S.

However, S&P said that Everest Re reports that it is not aware of any events that were named storms but not hurricanes when they made landfall that would have caused losses in excess of $110 million, the initial franchise deductible amount.

In terms of price guidance, the Class A per-occurrence notes are being offered to investors with an interest spread coupon of 5.25% to 5.75%. The Class B aggregate notes are being offered with an interest spread coupon of 5% to 5.5%.

Update 1:

Sources said that the Kilimanjaro Re cat bond has seen robust investor demand leading to it being oversubscribed and as a result the deal has been lifted from the $250m it launched at to now offer $450m of notes.

The Class A tranche of notes has doubled in size from $125m to $250m Artemis understands.

The Class B tranche of notes has grown from $125m to now stand at $200m in size.

At the same time the pricing has been lowered on both tranches, once again providing a demonstration of where U.S. property catastrophe reinsurance and retrocession rates are likely headed at the mid-year renewals.

The Class A per-occurrence notes price guidance was lowered down to a range of 4.75% to 5.25%, so below the original range.

The Class B aggregate notes price guide range was lowered down to a range of 4.5% to 5%.

Update 2:

Both tranches of notes priced at the low end of the already reduced ranges.

The pricing guidance for the Class A per-occurrence notes started at 5.25% to 5.75%, but was subsequently lowered down to a range of 4.75% to 5.25%, so below the original range. At final pricing Artemis understands that these $250m of Class A notes will pay investors a coupon of 4.75%, right at the lowest end of the reduced range. That’s a drop in pricing of around 16% from the mid-point of the launch guidance.

The Class B annual aggregate notes were initially offered with an interest spread coupon of 5% to 5.5%, which subsequently dropped to 4.5% to 5%. The pricing on this $200m tranche of notes finished again at the lowest end of the reduced range, offering investors a coupon of 4.5%. That’s a price reduction of almost 17% from the mid-point of the launch guidance range.