Everest Reinsurance priced an upsized, $500 million catastrophe bond Friday off of its Kilimanjaro Re platform.
Aon Benfield was the sole structuring agent and bookrunner, according to Standard & Poor’s.
The bond transfers the risk of damage from earthquakes in the United States, the District of Columbia, Puerto Rico and all of the provinces and territories of Canada over a period of five years. Proceeds are deposited in a money market fund and, if no earthquake of sufficient magnitude occurs, investors keep their principal and collect interest. However, if a sufficiently large catastrophe occurs, the principal could be forgiven, allowing Everest Re to use this money to pay claims.
While the coverage ends in November 2019, there is the potential for the transaction to extend by up to 36 months to allow for the reporting of losses that were incurred during the coverage period.
S&P has assigned a preliminary 'BB-' rating to the Series 2014-2 Class C notes.
According to catastrophe bond website Artemis Re, the offering was launched at $350 million and quickly grew by $150 million. 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%, indicating that investors would not buy into this risk at any cost.
In its presale report S&P noted that it applied a slightly higher stress level than it typically would for a cat bond deal triggered by industry losses, primarily because of the exposure to Cascadian subduction zone, an overlapping of tectonic plates stretching from northern Vancouver Island to northern California. The rating agency also cited the potential for losses related to a tsunami and the fact that there is no maximum time frame specified over which an earthquake event can occur. However this additional stress did not change the rating.
Based on analysis by modeling firm AIR Worldwide, there have been six earthquakes since 1700 that would have resulted reductions in principal to the Series 2014-2 Class C notes: the 1732 Montreal Region; 1906 San Francisco; 1811-1812 New Madrid; 1700 Cascadia; 1886 Charleston, S.C.; and the 1838 San Andreas fault 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 western part of Canada contributes significantly to the expected loss for this cat bond: British Columbia is at 9.9%, followed by Washington at 7.8%. However Quebec, on Canada’s east coast, contributes even more, 10.2%, while the biggest exposure is to California, at 50.4%.