Queen Street IX Re catastrophe bond launched for Munich Re

by Artemis on February 11, 2014

The world’s biggest reinsurance firm Munich Re is sponsoring Queen Street IX Re Limited, the second catastrophe bond the reinsurer has pitched to capital market investors which includes the diversifying peril of Australian cyclone risk.

Queen Street IX Re Ltd. is Munich Re’s second catastrophe bond which sees the reinsurer seeking a multi-year source of fully-collateralized, retrocessional reinsurance protection for the perils of U.S. hurricanes and Australian cyclones. The cat bond will likely be seen as a diversification opportunity of sorts for investors, given the inclusion of an Australian peril.

Interestingly Queen Street IX Re is almost a copy of Munich Re’s Queen Street VIII Re Limited from June 2013, which also saw U.S. hurricane and Australian cyclone risks combined in a single insurance-linked securitization. In fact, the two cat bonds have near identical risk levels, showing that with Queen Street IX Munich Re is looking to expand the capital markets participation in that layer of its retrocessional reinsurance program.

Queen Street IX Re Limited is an Irish domiciled special purpose reinsurance vehicle, interesting as Munich Re’s Queen Street cat bonds have tended to be Bermuda domiciled in the past. The vehicle will issue a single tranche of catastrophe bond notes for the purpose of collateralizing a retrocessional reinsurance contract for Munich Re. The deal is not being marketed with a preliminary size, Artemis understands, so at the moment it is not known how large this cat bond could become.

The reinsurance protection provided by Queen Street IX Re will be on a per-occurrence basis over just more than three years. The risk period for U.S. hurricane events will run from March 1st 2014 to December 1st 2016, while for Australian cyclones the risk period will run from March 1st 2014 to May 31st 2017.

Both of the covered perils will use a type of industry loss index trigger. The trigger for U.S. hurricane risks is a county and line of business weighted PCS industry loss index, while the trigger for Australian cyclone risks is a post-code and line of business weighted modelled industry loss index.

The attachment, exhaustion and expected loss for the notes are identical to Munich Re’s Queen Street VIII cat bond, coming in with an attachment probability of 3.91%, an exhaustion probability of 1.88% and an expected loss of 2.72%. Australian cyclone risks contribute just over half (56%) of the expected loss of the cat bond, at 1.51% compared to 1.23% for U.S. hurricane risks.

One difference between this Queen Street IX Re cat bond and Munich Re’s previous Queen Street VIII Re deal is the pricing guidance. Despite the fact that the risk levels are identical the price guidance on Queen Street IX Re is lower from the launch. The Queen Street IX Re cat bond has launched with a price guidance range of 6% to 6.5%.

The Queen Street VIII Re cat bond launched with price guidance of 6.75% to 7.5%, which was subsequently tightened to 6.5% to 7% and settled at 6.5%. So Munich Re’s latest cat bond is already pitching itself as priced more cheaply from launch and it will be interesting to see where this deal settles to compare price declines on cat bond issuance since last June.

For comparison, the mid-point of launch price guidance of Queen Street IX Re is over 12% lower than the mid-point of launch guidance of Queen Street VIII Re and 4% lower than the earlier deal settled at.

Munich Re is arranging and structuring this cat bond itself while GC Securities is the sole bookrunner on the transaction. AIR Worldwide is providing risk modelling services.

While this cat bond offers a degree of diversification, as it includes Australian cyclone risks, the fact that it is alongside U.S. hurricane risk in a single tranche makes the diversification benefit minimal.

An interesting point to note however, is that the two perils covered by this deal are at their peaks at opposite ends of the year, meaning that for the summer months U.S. hurricane risk will be the main threat, while over the winter Australian cyclones will be the risk that worries investors.

Munich Re is one of the more prolific sponsors of catastrophe bond transactions, this is its ninth transaction issued under a Queen Street branded vehicle and the seventeenth entry in our Deal Directory with Munich Re listed as a cat bond or insurance-linked securitization sponsor or cedent.

That’s all we have on Queen Street IX Re Ltd. for the moment, we hope to bring you more details as the transaction comes to market. The deal has been added to the Artemis Deal Directory and we will update you as more information becomes available.

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