Suddenly the catastrophe bond market is alight with activity, as the third new transaction in as many days launches to an expectant investor community. The eagle-eyed amongst you may have noticed that we added basic details on this new cat bond to our Deal Directory yesterday and we’ve sourced enough information from contacts to make it news worthy this morning. Queen Street VII Re Ltd. is another cat bond from regular sponsor, reinsurer Munich Re.
Queen Street VII Re will be Munich Re’s third trip to the catastrophe bond market in 2012, following on from Queen Street V Re Ltd. in February and Queen Street VI Re Ltd. in July. The transaction has a lot in common with those, and is extremely similar to their most recent deal.
Queen Street VII Re Ltd. is a Bermuda registered special purpose insurer and will enter into a retrocession contract with Munich Re for the purpose of providing a source of fully-collateralized U.S. hurricane and European windstorm cover. The sale of the notes issued by Queen Street VII Re will collateralize that retrocession contract.
Both perils, U.S. hurricane and European windstorm, will be covered on a per-occurrence basis through Queen Street VIII. With this latest cat bond, Munich Re are seeking to increase and extend their capital markets sourced fully-collateralized retro reinsurance cover for these perils.
The transaction is structured in a single tranche of notes which according to source have a current size of $75m. We’re told that investors expect this deal to upsize with demand as the recent Queen Street VI did.
U.S. hurricane cover is across the usual suspect states along the eastern seaboard and gulf coast, including Florida. European windstorm cover is for the PERILS supported countries of northern and western Europe.
The transaction will use an industry loss trigger, with PCS country weighted industry loss index for U.S. hurricane risks, and PERILS Cresta zone weighted industry loss index for European windstorm.
This deal both extends and expands the amount of cat bond cover Munich Re have for these two perils. The risk period for European windstorm exposure begins on 1st November 2012 and runs to 31st March 2016, so covering four European windstorm seasons. The U.S. hurricane cover begins on 1st April 2013 and runs till 31st March 2016, so covering three hurricane seasons.
We’re told that the notes issued by Queen Street VII Re have an attachment probability of 3.89%, an expected loss of 2.72% and an exhaustion probability of 1.86%, which is an extremely close risk profile to the Queen Street VI deal from July. This suggests Munich Re are extending their cover for that level of losses within their retro program, or perhaps just bringing more of it to the cat bond market.
Collateral is expected to be dealt with in similar fashion to their earlier Queen Street deals, with their MEAG investment subsidiary managing investments in U.S. Treasuries.
Pricing for the deal is expected to be in the range of 9.00% to 9.75%, which is a lower guidance range than Queen Street VI priced at 10.35%. Given the very similar risk profile, it will be interesting to see where this deal finally prices as it will be a good indicator of how much the rate (or cost) for transferring risk to the cat bond market has come down in recent months.
The fact Munich Re have increased the frequency with which they return to the cat bond market is perhaps testament to the health of the sector and the pricing that they can achieve. They have issued three cat bonds in 2011 and in 2012, when before that their transactions had almost a year apart. The market needs regular sponsors like Munich Re who investors can rely on to bring regular deals.
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