Queen Street V Re Ltd.

Munich Re are a regular participant in the ILS and cat bond markets, and this latest cat bond will be their fifth Queen Street deal. This deal is being issued by Queen Street V Re Ltd., a Bermuda domiciled SPV established for this transaction.

Queen Street V Re Ltd. is seeking to issue $75m of catastrophe bond notes exposed to U.S. hurricanes and European windstorms. U.S. north Atlantic hurricanes in certain States (details below) will be covered from April 2012 to March 2015 (three hurricane seasons). European windstorm coverage in specified European countries will be from October 2012 and March 2015 (three European windstorm seasons). The three years of fully collateralized cat bond cover will give Munich Re industry loss based retrocessional protection on a per-occurrence basis for these two peak perils.

The index based industry-loss cover will be triggered based on indices from Property Claims Services (PCS) for U.S. hurricane risks and PERILS AG for European windstorm cover. AIR Worldwide provide risk modelling services.

Following a qualifying event, AIR will calculate an index value against which a triggering event will be determined. The notes provide protection to Munich Re for U.S. hurricane losses above an index value of 104,000, up to 136,000 and Europe windstorm losses above an index value of 16,400 up to an index value of 19,925 (both on a per-occurrence basis). For U.S. hurricanes, county level PCS industry loss data and predetermined payout factors by county and line of business will be used to determine the index value. For European windstorm events industry loss data reported by PERILS and CRESTA Zone level predetermined payout factors will be used.

The Queen Street V Re notes cover U.S. hurricanes that cause losses in the District of Columbia and the following U.S. states: Alabama, Arkansas, Connecticut, Delaware, Florida, Georgia, Illinois, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Mississippi, Missouri, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Vermont, Virginia and West Virginia.

European windstorm coverage is in the following European countries: Belgium, Denmark, France, Germany, Ireland, Luxembourg, the Netherlands, Norway, Sweden, Switzerland and the UK.

Modelling shows that no recent historical events, either U.S. hurricanes or European windstorms would have reached the index level attachment points and caused a loss to these notes.

The notes have a base expected loss of 1.8%. Initial attachment probability has been set at a base of 2.42%. Guidance pricing for the notes has been put at between 7.9% and 8.5% above money market funds. The deal finally priced at 8.5%.

Proceeds from the sale of the notes issued by Queen Street V Re Ltd. will be invested in pre-selected U.S. Treasury money market funds rated ‘AAAm’.

Ratings agency Standard & Poor’s have assigned a rating of ‘B+’ to the single $75m tranche of Queen Street V Re notes.

Update August 2013:

S&P said that the risk modeller and calculation agent for the transaction AIR Worldwide released a reset report on the 1st July, detailing new attachment and exhaustion points based on updated exposure information.

For U.S. hurricanes risks, the updated attachment point is an index value of 110,944 (from 104,000) and the updated exhaustion point is an index value of 143,863 (from 136,000). For European windstorms, the updated attachment point is an index value of 13,067 (from 16,569) and the updated exhaustion point is an index value of 16,174 (from 20,414).

S&P notes that since the Queen Street V Re cat bond was issued in February 2012, the sponsor Munich Re has shifted its exposures in Europe towards the UK from France and Germany. As well as this shift in exposure, PERILS industry exposure database has seen an increase in market penetration.

This has led to a change in the CRESTA Zone level payout factors in Europe, which coupled with risk modeller AIR’s disaggregation process has resulted in a lasting change in the shape of the “exceedance probability” curve for Queen Street V Re over time, according to S&P.

So, while the change in attachment points detailed above could make it looks like the European windstorm risk profile has increased, the changes in exposure, moving towards the UK, actually means that the risk of an event causing sufficient losses to reach the attachment point has decreased significantly enough to warrant a lift in the rating. Here the payout factors show their importance in calculating the probability of attachment and EP curve for a cat bond and show that the attachment point should not be looked at in isolation.

After taking these new findings into account, S&P has adjusted the rating on the catastrophe risk to ‘BB-’ from ‘B+’, and as a result has also raised the rating on the Queen Street V Re notes to ‘BB- (sf)’ from ‘B+ (sf)’.