Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

Kilimanjaro Re cat bond prices at mid-point, gets preliminary rating


Everest Re’s latest catastrophe bond, the now $500m Kilimanjaro Re Ltd. (Series 2014-2), has been priced with the coupon settling at the mid-point. The cat bond notes have also received their rating and a little more detail on the transaction has emerged as a result.

The Kilimanjaro Re 2014-2 cat bond launched targeting $350m of retrocessional protection for certain U.S. and Canadian earthquake risks for reinsurance firm Everest Re. 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

The cat bond quickly grew by $150m to reach $500m in size, as ILS investors demonstrated that demand for new issuances is set to be strong through the coming months. At the same time the price guidance, which began with a range of 3.5% to 4%, moved to the mid-point at 3.75% as investors showed they would not buy into this risk at any cost.

We understand that on Friday the deal was officially priced at the 3.75% mark, remaining at $500m in size. That sets the deals multiple at approximately 2.6 times the expected loss figure of 1.46%, which while a little lower than the average multiple of 2014 catastrophe bond issuance so far, is not that far off. This provides further evidence that ILS and cat bond pricing is stabilising and investors have found their pricing floor.

Also on Friday, rating agency Standard & Poor’s released the preliminary rating for the $500m of Kilimanjaro Re 2014-2 Class C notes. 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.

As ever, the S&P report reveals some additional details about the transaction which were not previously available to us.

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.

This cat bond deal is expected to settle on the 18th November and the risk period will come into force on the 19th November 2014, with maturity due 18th November 2019, making it a five-year duration cover for Everest Re.

You can read all about Kilimanjaro Re Ltd. (Series 2014-2) in our catastrophe bond Deal Directory.

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