PXRE Acquires $300 Million Cat Bond Backup Reinsurance

It may be a case of locking the barn door after the horse has gone (see following article), but Bermuda-based PXRE has taken a significant step to protect itself “from extreme catastrophe losses arising from hurricanes in the Eastern and Gulf coasts of the United States, windstorms in northern Europe and earthquakes in California over the next 5 years,” said a company announcement.

PXRE has concluded a $300 million collateralized reinsurance agreement with Atlantic & Western Re Limited, a Cayman Island reinsurance company. “The new reinsurance provides two layers of protection over the next 5 years to PXRE,” the announcement continued. “The first layer provides $200 million of coverage for losses arising from hurricanes in the Eastern and Gulf coasts of the United States, windstorms in northern Europe and earthquakes in California. The second layer provides $100 million of coverage for losses arising from hurricanes in the Eastern and Gulf coasts of the United States and windstorms in northern Europe.”

President and CEO Jeffrey L. Radke commented: “With the completion of this transaction, we are supplementing our risk management program to provide further insulation for our equity from large but remote catastrophe events. The $300 million of new risk capital provided by this multi-year collateralized reinsurance, when combined with our existing capital, provides us with significant additional resources to meet our obligations to our clients in even the most extreme loss scenarios.”

He added that he fully expects “that our ability to execute this transaction so quickly following Hurricanes Katrina, Rita and Wilma at an 8.7 percent annual cost of capital will prove to be a competitive advantage in the coming renewal season.”

PXRE said the “reinsurance coverage is based on a modeled loss trigger. PXRE 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 PXRE will make a recovery under the reinsurance agreement. PXRE has the right to reset the notional portfolios after three years.

“On November 8, 2005, Atlantic & Western Re financed the reinsurance coverage through the issuance of $300 million in catastrophe bonds pursuant to Rule 144A under the Securities Act of 1933. Goldman, Sachs & Co. acted as the placement agent for the transaction.”

Topics Catastrophe Mergers & Acquisitions USA Europe Hurricane Reinsurance