Compass Re Ltd. 2011-1 catastrophe bond comes to market for Chartis subsidiary

by Artemis on November 4, 2011

A new catastrophe bond has begun marketing for ceding insurer National Union Fire Insurance Co. of Pittsburgh, a subsidiary of Chartis. Chartis (themselves an AIG subsidiary) are of course a regular cat bond sponsor and their two Lodestone Re cat bonds issued in 2010 both provided cover to the same subsidiary. Compass Re Ltd. Series 2011-1 is a three tranche cat bond with a preliminary size of $275m and is designed to provide National Union Fire Insurance Co. of Pittsburgh with cover for U.S. hurricanes and earthquakes.

Compass Re Ltd. is a Bermuda domiciled special-purpose insurer set up for the issuance of catastrophe bond transactions. This 2011-1 issuance is designed to provide the sponsor with protection on a per-occurrence basis for the Class 1 notes, and on an annual aggregate basis for the Class 2 and 3 notes, over a three-year risk period against certain hurricane and earthquake risks in the covered areas through index-based risk transfer via a reinsurance agreement.

This cat bond has been structured in quite an interesting manner to afford the best protection to the sponsor. Each class of notes is exposed to both hurricane and earthquake risks, rather than having specific peril exposed tranches.

The Class 1 notes, with a preliminary size of $75m, provide cover on a per-occurrence basis for a pro-rata share of losses in excess of an attachment point of $5 billion up to an exhaustion point of $6 billion. The Class 2 notes, with a preliminary size of $100m, provide cover on an annual aggregate basis for a pro-rata share of losses in excess of an attachment point of $4.5 billion up to an exhaustion point of $5 billion. The Class 3 notes, with a preliminary size of $100m, provide cover on an annual aggregate basis for a pro-rata share of losses in excess of an attachment point of $4 billion up to an exhaustion point of $4.5 billion.

The Class 2 and 3 notes have an event limit and therefore require at least two covered events to occur before Compass Re will be triggered and due to make a payout to the sponsor. The initial event limit for the Class 2 notes is $4.5 billion and for the Class 3 notes is $4 billion. The event limit will be reset annually and will be equal to the attachment point for each tranche. The minimum Event Index Value, so the minimum sized covered event, is $50 million for the Class 2 and Class 3 notes.

The trigger will be calculated using PCS reported insured personal and commercial line loss figures on a per state basis with predetermined state payout factors. Payout factors, attachment and exhaustion levels are all subject to annual resets based on updated exposure data. AIR Worldwide are modelling, reset and calculation agent.

So Compass Re will provide cat bond coverage to the cedent for U.S. hurricanes in certain states (Gulf, East and Florida) and U.S. earthquakes across all 50 states and District of Colombia from $4 billion to $6 billion on an annual aggregate basis moving to a per-occurrence basis for the higher level of cover. The deal runs over three years and if it comes to market as quickly as the sponsor would like should provide cover until the 31st December 2014.

As with the majority of recent cat bonds, collateral for the transaction will be held in Treasury money-market funds. The deal is being structured by Aon Benfield Securities who are also acting as joint bookrunner alongside BNP Paribas.

Standard & Poor’s have given the three tranches of this Compass Re cat bond preliminary ratings of ‘BB-‘ for Class 1, ‘BB-‘ for Class 2 and ‘B+’ for Class 3.

Given the initial size of this cat bond at $275m and the fact that both Lodestone Re deals were over $400m due to the way Chartis managed to upsize them from investor demand, they may seek to upsize this deal and Compass Re could provide an opportunityfor the cat bond market to finish the year strongly. With another deal ready to come to market any day now from regular cat bond sponsor USAA the rest of the year could be busy.

This Compass Re Ltd. cat bond deal has been added to our catastrophe bond Deal Directory and we’ll update you as it comes to market.

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