Kilimanjaro Re Ltd. (Series 2014-2) – Full details:
Everest Re is seeking a source of fully-collateralized retrocessional reinsurance protection against losses from U.S. earthquakes. The reinsurer is seeking $350m of protection from the bond, which together with its earlier cat bond would give Everest Re $800m of protection from the capital markets in cat bond form.
Kilimanjaro Re Ltd., Everest Re’s Bermuda domiciles special purpose insurer, will seek to issue a single tranche of Series 2014-2 Class C notes which will be exposed to U.S. and Canadian earthquakes. The deal is said to have a five-year term and the structure has been designed around a PCS industry loss trigger.
Coverage will be for the U.S., Puerto Rico and also Canada, sources tell us. The trigger itself will be a regional weighted industry loss index, based on PCS reported catastrophe losses for qualifying earthquake events. The cat bond will provide per-occurrence protection from an initial industry loss index attachment point of $1.075 billion up to $2.150 billion.
S&P always stresses the exceedence probability curve of a cat bond deal when rating it, to take into account any uncertainty or unmodelled risks. In the case of this cat bond S&P notes that it applied a slightly higher stress level, than it would typically for an industry loss cat bond deal, primarily due to the cat bond having exposure to the Cascadian subduction zone, the potential for losses related to a tsunami and because there isn’t a maximum time frame specified over which an earthquake event could occur. However this additional stress test did not change the rating.
The concerns that S&P cites are;
* The risks of a Cascadian subduction zone eruption could be slightly understated.
* Tsunamis are not a modeled risk for the entire covered area.
* There is significant exposure to losses in Canada, resulting in currency risk. On this point S&P notes that if there were a 10% negative movement in the exchange rate, U.S. to Canadian dollar, the probability of attachment would increase by three basis points.
* Investment risk related to the Treasury money market funds held in the reinsurance trust account. Interestingly the collateral will be invested in a named fund, the Morgan Stanley Institutional Liquidity Fund. We don’t typically see a fund named, it is more usual to just see that it will be invested in money market funds.
Historical risk modelling by AIR Worldwide shows that there have been six earthquake events since 1700 that would have resulted in a reduction in principal to the cat bond notes:
The 1732 Montreal Region; 1906 San Francisco; 1811-1812 New Madrid; 1700 Cascadia; 1886 Charleston, S.C.; and 1838 San Andreas fault (extending from San Francisco to San Juan Bautista) earthquakes. The first four events would have resulted in a 100% reduction of principal and the last two would in a 70% and 32% principal reduction, respectively. The 1994 Northridge and 1989 Loma Prieta events generated model event index values of $706 million and $190.5 million, respectively.
As you’d expect, California contributes the highest percentage of the expected loss for this cat bond, at 50.4%, with commercial exposures making up the largest proportion. Interestingly though, the next highest regional risk is in Quebec, British Columbia and Washington.
The initial attachment probability for the notes will be set at 2.26%, while the initial expected loss will be 1.46%.
In terms of pricing, we understand that the Kilimanjaro Re 2014-2 catastrophe bond notes will be marketed with a coupon guidance range of 3.5% to 4%.
The Kilimanjaro Re Ltd. (Series 2014-2) catastrophe bond reflecting strong investor demand for the ILS asset class is set to increase in size by 43% to secure the reinsurer $500m of protection.
The single tranche of Series 2014-2 Class C notes, exposed to U.S., Puerto Rico and also Canada earthquakes on a PCS industry loss trigger and per-occurrence basis, launched with price guidance of 3.5% to 4%. We understand that this guidance has moved to the mid-point at 3.75% where investors tell us they have an expectation it will stay when the deal reaches final pricing later today.
With an initial expected loss of 1.46% and pricing at 3.75% the deals multiple will be 2.6X.
The final pricing for this cat bond came in at 3.75%, while the size remained at $500m.
S&P assigned its ‘BB-(sf)’ preliminary rating to the notes, which cover losses on a per-occurrence basis from earthquakes (including fire following) in all 50 U.S. states, the District of Columbia, Puerto Rico, and all provinces and territories of Canada.