Zurich Insurance Group has increased the attachment point of its most recent catastrophe bond transaction, Lakeside Re III Ltd., at the transactions annual reset on 1st January citing increased exposure of its reinsurance requirements.
Zurich’s Lakeside Re III cat bond, which provides it with $270m of reinsurance protection for a $300m layer of its reinsurance program, after a 10% co-participation, covers it for earthquakes in the U.S. and Canada, specifically Californian, Pacific Northwest and New Madrid fault earthquake risks.
Protection provided by Lakeside Re III is on an annual aggregate and indemnity (ultimate net loss) trigger basis over a three-year risk period to 8th January 2016. The first risk period ended on 1st January and at each reset Zurich can submit new exposure data, detailing the risks in its book to ensure that the cat bond is maintaining a level expected loss and providing it with the cover it wants.
Based on the updated exposure data and a stated reinsurance report, while maintaining the expected loss of the reinsurance layer, the attachment point of the cover from Lakeside Re III has been lifted. When the deal launched the cat bond attached at $650m of losses, but after the reset this has been lifted to $696m of losses to Zurich. As a result the exhaustion point of the $300m layer of reinsurance has also risen to $996m of losses.
While the attachment point may have risen the deal is just as risky as before, as the expected loss is supposed to be maintained during the reset. What this increase in attachment means is that Zurich’s book of covered business contains a greater level of exposure, meaning that when maintaining the level of expected loss the actual point of attachment had to be lifted.
It should be noted that this is not what has become known as a flexible reset feature, where a cat bond can be moved up and down within a reinsurance tower. No change to the investors coupon will have been made in this case, rather the increase in attachment point simply reflects an increase in exposure while maintaining the expected loss of the cat bond notes.
You can see Zurich’s updated reinsurance program, including where the Lakeside Re III catastrophe bond fits, below.