Another catastrophe bond has settled and completed today, securing a source of hurricane reinsurance protection for the two North Carolina wind pools, the North Carolina Joint Underwriters Assn. (NCJUA) and the North Carolina Insurance Underwriters Assn. (NCIUA). The successful completion of the Tar Heel Re Ltd. (Series 2013-1) cat bond brings another $500m of risk to the cat bond market which takes completed issuance for 2013 to $1.851 billion.
Tar Heel Re, a Bermuda domiciled special purpose insurer, has issued a $500m single tranche of notes to investors to collateralize a reinsurance agreement between itself and Munich Re America, however the cat bond actually covers the loss experience of the two NC wind pools rather than Munich Re America itself.
Reinsurance cover is afforded on an annual aggregate catastrophe excess of loss basis for hurricanes causing losses to the North Carolina wind pools and uses an indemnity trigger. For a hurricane to qualify as a covered event it has to be a named storm which causes a loss to the covered book of business, it also has to have been designated a catastrophe by Property Claims Services (PCS) and have an estimated industry loss total of over $100m reported by PCS. That’s a unique way to define a covered event and should have made the transaction easier to fit to the wind pools reinsurance needs and also helped to make it attractive to investors looking to invest in sensibly structured protections.
Tar Heel Re covers 100% of losses from an attachment point of $2.025 billion up to an exhaustion point of $2.525 billion. The initial attachment probability is 2.08%, the initial exhaustion probability is 1.52% and the initial expected loss is 1.77%.
The single tranche of notes grew in size by 150% from an initial $200m to close offering the NC wind pools $500m of cover. The pricing, or coupon paid to investors, began at a range of 9% to 10% but by the time the deal closed it had dropped down to 8.5% making the deal very successful for the sponsors as they secured a greater level of cover at a cheaper price. This also further demonstrates the strong investor appetite for catastrophe reinsurance risk assets.
It is the fourth catastrophe bond sponsored by the NCJUA and NCIUA, although the first to provide annual aggregate protection. It follows on from the Parkton Re Ltd deal in 2009, the first Johnston Re Ltd. deal in 2010 and the Johnston Re Ltd. (Series 2011-1) deal.
The transaction uses RMS as risk modeller and it is the first rated cat bond that has used the RMS hurricane model since it launched RMS v11, as we noted when we first covered the launch of Tar Heel Re. It’s also the first time the North Carolina wind pools have used RMS modelling, the three previous cat bonds they sponsored all used AIR Worldwide risk models.
Rating agency Standard & Poor’s also highlighted the change of modeller to RMS, saying “Due to the significant differences between the ways AIR Worldwide Corp. and RMS model losses, the stress rate we applied to the aggregate exceedance probability curve was higher as compared with the indicative level for indemnified transactions set forth in our criteria.”
S&P has assigned its ‘B+’ rating to the $500m series 2013-1 notes that were issued by Tar Heel Re.
The single tranche of Series 2013-1 Class A Variable Rate Notes Due 09 May 2016 has been admitted for listing on the Bermuda Stock Exchange, with support from listing sponsor Appleby Securities (Bermuda) Ltd.
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