Bermuda’s PXRE Group Ltd. has given details of its $250 million collateralized transaction with Atlantic & Western Re II Limited, a Cayman Island reinsurance company. The agreement is designed to provide coverage to PXRE for second event losses arising from hurricanes in the Eastern and Gulf coasts of the U.S., windstorms in northern Europe and earthquakes in California.
A.M. Best had noted in affirming the property reinsurer’s ratings that the company’s additional capital raising initiatives and the securitization agreement had “stabilized PXRE’s current ratings.” (See IJ Website Dec. 22). In addition the securitization agreement relies on catastrophe models for determining its attachment points (see below), and is one of the first of its kind to be concluded following last fall’s hurricanes, which raised questions about the efficacy of a number of catastrophe models
President and CEO Jeffrey L. Radke commented: “With the completion of this transaction, we are further supplementing our risk management program to provide additional protection against multiple significant catastrophe losses in a single year. The $250 million of new risk capital provided by this collateralized transaction, when combined with our existing capital and prior catastrophe bond transaction, provides us with significant additional resources to meet our obligations to our clients.”
He noted that the “catastrophe bond transaction provided PXRE with significant additional resources to protect against the risk of a single extreme catastrophe event. The unprecedented frequency of hurricanes over the last two years and the recent changes to rating agency capital adequacy models further emphasize the importance of a capital base that can absorb losses from more than one large catastrophe. We were able to leverage the knowledge and modeling from our November catastrophe bond transaction to quickly and efficiently create a structure that would provide us with significant additional protection at an average annual cost of capital of only 6.2 percent. We expect that this will provide us with a further competitive advantage in the current renewal cycle.”
The securitization provides two tranches of protection to PXRE for the risk that a second significant catastrophe loss arising from a hurricane in the Eastern and Gulf coasts of the United States, a windstorm in northern Europe or earthquake in California occurs following the occurrence of a first significant hurricane, windstorm or earthquake loss. The first tranche provides $125 million of protection from January 1, 2006 through December 31, 2006. The second tranche provides $125 million of protection from January 1, 2006 through December 31, 2008.
PXRE said the coverage is based on a modeled loss trigger. The model “created a series of notional portfolios of reinsurance contracts designed to closely mimic the exposures in PXRE’s assumed reinsurance portfolio. Upon the occurrence of a hurricane, windstorm or earthquake in the covered territories, the parameters of the catastrophe event are determined and modeled against the notional portfolios. If the modeled loss to the notional portfolio exceeds the attachment point for the peril at issue, then the coverage is activated. Upon the occurrence of a second catastrophe event in the covered territories during that calendar year, the parameters of the catastrophe event are determined and modeled against the notional portfolios. If the modeled loss to the notional portfolio for the second event exceeds the attachment point for the peril at issue, then PXRE will make a recovery under the agreement.
“On December 21, 2005, Atlantic & Western Re financed the coverage through the issuance of $250 million in catastrophe bonds pursuant to Rule 144A under the Securities Act of 1933. The bonds have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. Goldman, Sachs & Co. acted as sole manager for this transaction.”
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