The first catastrophe bond sponsored by American Modern Insurance Group Inc., Queen City Re Ltd. (Series 2013-1), has completed successfully giving it a $75m source of collateralized named storm reinsurance protection backed by capital markets.
American Modern Insurance Group is a U.S. insurance subsidiary of the world’s largest reinsurance firm Munich Re. With the issuance of Queen City Re Ltd., American Modern has further diversified its sources of reinsurance protection to now include insurance-linked securities (ILS) market investors.
The Queen City Re cat bond notes have an attachment probability of 1.46%, an expected loss of 0.46% and an exhaustion probability of 0.1%. The attachment point is $200m of losses and the exhaustion point is $500m of losses, so the deal covers a percentage of losses across a $300m layer of American Modern’s reinsurance tower.
The protection is on an indemnity basis for U.S. named storms and the subject business covered by the Queen City Re cat bond includes residential properties, financial institutions lines associated with residences and some recreational products such as boats as well.
Munich Re, who structured the transactions, hailed the diversity within the book of business that came to market in Queen City Re as unprecedented.
“With manufactured housing, mortgage fire, lender-placed insurance and recreational products being part of the cat bond’s subject business, the transaction transferred an unprecedented mix of risks on an indemnity basis to the capital market, providing American Modern with three-year protection against US named storm events,” said the reinsurer.
The reinsurance protection provided by the Queen City Re cat bond, three-year protection against U.S. named storms (tropical storms and hurricanes) on a per-occurrence basis, will have been attractively priced for the insurer. This is both due to the lower-cost of ILS capital and also because the coupon it will pay to investors for the protection dropped in price significantly while the cat bond was marketed.
Manuel Z. Rios, President and CEO of American Modern, commented; “This is the first time we have used a cat bond to provide risk capacity. We are pleased it was well received by the capital markets, which we see as a complement to traditional reinsurance coverage.”
The $75m Queen City Re cat bond launched with price guidance of 4% to 4.75%, which was soon tightened and reduced below that original guidance to a range of 3.5% to 4%. Finally the transaction priced offering investors a coupon at the bottom of that already reduced range of 3.5%.
So American Modern secured a reduction in the expected pricing for its first catastrophe bond of 20%, taken from the mid-point of the original guidance range, or as much as 26%, from the top of that original range. The coupon paid by a cat bond sponsors is similar to the premium paid for reinsurance, so it’s possible that such a large drop will have seen American Modern secure the $75m of cover more cheaply than it could have in the traditional reinsurance market.
Munich Re, the insurers parent, acted as structurer for this cat bond issuance, while Willis Capital Markets & Advisory acted as bookrunner. AIR Worldwide provided risk modelling services.
“We are pleased to have assisted our own subsidiary American Modern with this innovative and diversifying capital markets transaction. This is the fourth cat bond issue this year and complements Munich Re Group’s managing risks capabilities in a way that is beneficial for both sponsors and investors”, said Thomas Blunck, a member of Munich Re’s Board of Management.
Tony Ursano, CEO, Willis Capital Markets & Advisory, commented on the deals completion; “Investors were eager to support a new sponsor to the market. The transaction was substantially oversubscribed and pricing ended up well below the initial price guidance. We are pleased to have been chosen to work on this transaction and deliver world class execution for American Modern.”
Queen City Re Ltd. is a Bermuda domiciled special purpose insurer. The $75m single tranche of notes issued by Queen City Re have been admitted to listing on the Bermuda Stock Exchange (BSX), which on top of the recent Windmill I Re 2013-1 , takes insurance-linked listings on the BSX to approximately $9.291 billion. Prime Management Ltd. acted as listing sponsor.
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