Insurance giant Liberty Mutual has returned to the catastrophe bond market for the first time since 2012, as the company seeks a $200 million source of catastrophe reinsurance from the capital markets by sponsoring a Mystic Re IV Ltd. (Series 2021-1) transaction.
Not only is this Liberty Mutual’s first catastrophe bond in eight years, its last was Mystic Re III Ltd. (Series 2012-1) in March of that year, we’re told it is also going to feature an industry loss trigger.
While Liberty Mutual does have a reinsurance arm, in this case the industry loss based coverage has been selected over indemnity for a capital markets backed reinsurance transaction.
That’s interesting, as the company opted for indemnity coverage in its last transaction in 2012, with cat bonds prior to that having also been industry loss. But a return to the industry loss triggered cover does make a lot of sense for major carriers of this scale.
When your property portfolio is of the size and scale of Liberty Mutual’s, securing reinsurance on an industry loss basis can closely fit with your exposures.
Any major catastrophe loss event is going to cause Liberty Mutual significant losses to its insured portfolios, making matching its exposure to a weighted industry loss index trigger an appropriate form of reinsurance coverage.
Industry loss triggers are more commonly used for retrocessional protection, but Liberty Mutual has leveraged them now a few times for large reinsurance deals.
Liberty Mutual is seeking a three year source of U.S. multi-peril reinsurance coverage from its return to the catastrophe bond market in late 2020.
Mystic Re IV Ltd., a newly registered Bermuda SPI, will issue one tranche of notes that will be sold to cat bond investors and the proceeds used to collateralized underlying reinsurance agreements between Mystic Re IV and Liberty Mutual Insurance.
The reinsurance protection will cover Liberty Mutual against certain losses from U.S. named storms and U.S. & Canada earthquakes, with the covered area including Puerto Rico, DC and the U.S. Virgin Islands, on a per-occurrence basis and using an industry loss trigger.
We understand the transaction will come on-risk from January 1st 2021 and run to the end of 2023.
Mystic Re IV Ltd. is set to issue a targeted $200 million tranche of Series 2020-1 Class A notes, with the notes having an initial expected loss of 4.55% and being offered to cat bond funds and investors with coupon price guidance in a range from 9.25% to 10%, our sources said.
It’s perhaps no surprise to see Liberty Mutual return to the catastrophe bond market this year, a time when the capital markets are clearly offering significant value to cat bond sponsors.
It could be seen as more of a surprise to see the industry loss trigger back in use by a primary carrier, after it had tried out indemnity protection the last time it visited the cat bond market.
But with careful modelling and matching of an insurers exposure to the industry-wide impacts of major catastrophe loss events, an industry loss trigger can be calibrated to respond and perhaps also payout more quickly in some cases than an indemnity trigger is able to.
It’s also noteworthy that the executives responsible for reinsurance buying at Liberty Mutual have changed in recent times as well, so perhaps this represents a strategic shift back towards cat bonds for the insurer.