Mystic Re III Ltd. (Series 2012-1)

Liberty Mutual are seeking to secure a source of multi-year cat bond cover through a newly established Cayman Islands domiciled SPV, Mystic Re III Ltd. Mystic Re III has been set up as a shelf program to allow for further issuances.

In this issuance Mystic Re III is to issue two tranches of notes which will cover losses from hurricanes and earthquakes, including fire following, in the covered area on an indemnity and per-occurrence basis.

In this Series 2012-1 deal Liberty Mutual are hoping to achieve a source of indemnified risk transfer via a reinsurance agreement on a per-occurrence basis over a three-year risk period. The deal is scheduled to mature at some point in February 2015.

Mystic Re III will issue two tranches of Series 2012-1 notes. Both classes of notes will be exposed to the ultimate net losses of Liberty Mutual from qualifying U.S. hurricanes and earthquakes (including fire following) in personal and commercial lines of business. The Class A notes, targeting $75m in size, have an initial attachment level of $2.1 billion and an exhaustion level of $2.433 billion. The Class B notes provide a lower level of cover and attach at an indemnity loss figure of $1.3 billion and have an exhaustion point of $2.1 billion. So this cat bond aims to provide at least $150m of cover for indemnity losses suffered by Liberty Mutual between $1.3 billion and $2.433 billion. The amount of principal lost will we assume be on a sliding scale depending on the level of ultimate net loss between attachment and exhaustion points.

The probability of attachment and expected loss for each tranche of notes is as follows: 1.51% and 1.38% for the Class A notes and 3.01% and 2.17% for the Class B notes. There will be an annual reset at which time the attachment points will be reset so as to keep the probability of attachments the same. The initial probabilities of exhaustion for the notes are 1.25% for Class A and 1.63% for Class B.

The covered area for hurricane is: Alabama, Arkansas, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Mississippi, Missouri, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Vermont, Virginia, West Virginia, and the District of Columbia.

The covered area for earthquake is all 50 states and the District of Columbia, though the Class A notes will not cover losses in California from earthquakes.

Interestingly, the risk modelling shows that historical events that would have impacted the notes are not the usual events that you might have thought. For example, a historical Cat 3 hurricane which hit New York in 1938 comes closest to exhausting the deal and Katrina wouldn’t have triggered it, showing that Liberty Mutual’s coverage has a strong focus on the northeast for hurricane risks. Similarly on earthquakes, a historical New Madrid quake in 1812 would have exhausted both classes of notes while other major quakes would not.

Collateral proceeds from the sale of the Mystic Re III cat bond notes will be invested in highly rated Treasury money market funds.

Standard & Poor’s have assigned ratings of ‘BB’ for the Mystic Re II Ltd. Series 2012-1 Class A notes and ‘B’ for the Series 2012-1 Class B notes.

Update: During the final days of the marketing phase the Mystic Re III cat bond almost doubled in size to $275m. Class A jumped to $100m and Class B to $175m. Class A will pay a coupon of Treasury money market funds plus 9% and Class B 12%.