Compass Re Ltd. (Series 2011-1)

Compass Re Ltd. Series 2011-1 is a three tranche cat bond with a preliminary size of $575m (although it first came to market at $275m, but upsized significantly during the marketing phase) and is designed to provide Chartis subsidiary National Union Fire Insurance Co. of Pittsburgh with cover for U.S. hurricanes and earthquakes.

Compass Re Ltd. is a Bermuda domiciled special-purpose insurer set up for the issuance of catastrophe bond transactions.

Cover is afforded to the sponsor on a per-occurrence basis for the Class 1 notes, and on an annual aggregate basis for the Class 2 and 3 notes, over a three-year risk period against certain hurricane and earthquake risks in the covered areas through index-based risk transfer via a reinsurance agreement.

The Class 1 notes, with a preliminary size of $75m, provide cover on a per-occurrence basis for a pro-rata share of losses in excess of an attachment point of $5 billion up to an exhaustion point of $6 billion. The Class 1 notes are expected to pay a coupon of 9% over quarterly U.S. Treasury bills. Initial probability of attachment is 2.02%, expected loss is 1.63%.

The Class 2 notes, with a preliminary size of $250m (more than double the $100m they began marketing as), provide cover on a second and subsequent event annual aggregate basis for a pro-rata share of losses in excess of an attachment point of $4.5 billion up to an exhaustion point of $5 billion. The Class 2 notes are expected to pay a coupon of 10.25% over quarterly U.S. Treasury bills. Initial probability of attachment is 2.26%, expected loss is 1.67%.

The Class 3 notes, with a preliminary size of $250m (more than double the $100m they began marketing as), provide cover on a second and subsequent event annual aggregate basis for a pro-rata share of losses in excess of an attachment point of $4 billion up to an exhaustion point of $4.5 billion. The Class 3 notes are expected to pay a coupon of 11.25% over quarterly U.S. Treasury bills. Initial probability of attachment is 2.75%, expected loss is 2.01%.

The Class 2 and 3 notes have an event limit and require at least two covered events to occur before Compass Re will be triggered and due to make a payout to the sponsor. The initial event limit for the Class 2 notes is $4.5 billion and for the Class 3 notes is $4 billion.

The event limit can be reset annually and will be equal to the attachment point for each tranche. The minimum Event Index Value, so the minimum sized covered event, is $50 million for the Class 2 and Class 3 notes.

The trigger is calculated using PCS reported insured personal and commercial line loss figures on a per state basis with predetermined state payout factors. Payout factors, attachment and exhaustion levels are all subject to annual resets based on updated exposure data. AIR Worldwide are modelling, reset and calculation agent.

The deal runs over three years and will provide cover until the 31st December 2014.

Collateral for the transaction will be held in Treasury money-market funds.