U.S. insurer Liberty Mutual have launched their first catastrophe bond transaction since March 2009 (when they issued their last Mystic Re II deal), this will be their fifth catastrophe bond transaction. 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. In this issuance Mystic Re III is to issue two tranches of notes, both of which will be exposed to U.S. hurricanes and earthquakes on an indemnity, per occurrence basis.
According to investors and the Standard & Poor’s preliminary rating information, Mystic Re III will seek to issue two tranches of notes which are said to be targeting $75m each tranche, so making this at least a $150m cat bond (there’s always a chance for it to upsize given investor appetite). The two tranches are both exposed to hurricanes and earthquakes on a per-occurrence basis and the tranches would each afford a different layer of coverage due to tiered attachment levels at which indemnity losses suffered by Liberty Mutual would trigger the deal.
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.
Risk modelling for this deal is being provided by AIR Worldwide. Aon Benfield Securities and Swiss Re Capital Markets are joint structuring agents and bookrunners. Willis Capital Markets & Advisory are co-manager for the deal.
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 given the tranches to be issued by Mystic Re III preliminary ratings of ‘BB’ for the Series 2012-1 Class A notes and ‘B’ for the Series 2012-1 Class B notes.
The Mystic Re III Ltd. entity has been set up as a shelf facility by Liberty Mutual and so will allow for future issuances of notes should they choose to return to the capital markets for more cat bond protection.
The busy start to 2012 continues with this becoming the seventh cat bond to come to market so far this year. If this deal, and others in the market, successfully achieve their target sizes we could well have seen $1 billion of cat bond issuance before the end of the month. That would be a great start to the year after just two months.
We’ll update you as the deal comes to market and more details on the transaction structure can be found in our Deal Directory.