News | August 31, 1998

F&G Re Completes Reinsurance Securitization

St. Paul's F&G Re has completed a $54 million securitization transaction that provides additional capacity for a defined portfolio of U.S. property catastrophe excess-of-loss reinsurance contracts. Goldman Sachs and E.W. Blanch Capital Markets worked on the transaction, which funded Mosaic Re, a special purpose offshore reinsurer. Mosaic Re provided retrocessional reinsurance coverage to F&G Re, and simultaneously issued debt securities in a private placement.

The transaction introduced several new features to reinsurance securitizations. One involved the risk transfer between F&G Re and Mosaic Re—for the first time, providing retrocessional coverage on an aggregate excess-of-loss basis for a portfolio of reinsurance contracts. Another such feature involved the multiple tranches of securities issued by Mosaic Re. The securities provided investors with the opportunity to participate in different risk profiles and included, for the first time, a B- rated insurance-linked security.

Mosaic Re issued three types of one-year debt securities, whose returns are dependent on the underwriting experience of the portfolio of reinsurance contracts:

  • Class A Units, rated AAA by Duff & Phelps with respect to return of principal only. Interest payments on the Units will be LIBOR (London Interbank Offered Rate) plus 216.5 basis points. $18 million was raised through issuance of the Units, of which $9 million is invested in Defeasance Certificates which in certain circumstances can be used to provide for the full return of the principal of the Units within 15 years.
  • Class A Notes, rated BB by Duff & Phelps. Interest payments on the Class A Notes will be LIBOR plus 444 basis points. $15 million was raised in Class A Notes.
  • Class B Notes, rated B by Duff & Phelps. Interest payments on the Class A Notes will be LIBOR plus 827 basis points. $21 million was raised in Class B Notes.

A total of $45 million from the two tranches (Class A and Class B securities) is to be used as collateral for the reinsurance provided to F&G Re.

This is the second securitized reinsurance transaction by a St. Paul company. The first, by George Town Re, was completed in December 1996 for St. Paul Re and represented the first successful securitization by a U.S. reinsurer. This was a $68.5 million transaction.