Tar Heel Re Ltd. (Series 2013-1)

Tar Heel Re Ltd. is a Bermuda domiciled SPI seeking to issue cat bond notes designed to support the North Carolina wind pools the North Carolina Joint Underwriters Assn. (NCJUA) and the North Carolina Insurance Underwriters Assn. (NCIUA) with a source of hurricane reinsurance protection. The cover is afforded via a reinsurance agreement with Munich Reinsurance America.

Munich Reinsurance America are sponsoring the deal and are entering into a retrocessional reinsurance contract with the issuer, Tar Heel Re Ltd. but the cover is linked to the actual loss experience of the NCJUA and NCIUA rather than Munich Re’s own exposure in North Carolina. So the cat bond covers the reinsurance agreement between Munich Re America and the two non-profit wind pools.

What’s interesting about this cat bond is the change to the structure with a new way to qualify a storm as an event under the terms of the deal. All of the NCJUA / NCIUA cat bonds have been pure indemnity trigger deals, linked to the actual loss experience for storms affecting the state of North Carolina.

The Tar Heel Re 2013-1 cat bond issuance features a different way to define whether a storm is a covered event or not under the terms of the cat bond. Not only does it have 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 it has to have a reported industry loss total of over $100m.

The transaction uses an annual aggregate structure which is the first time these non-profit wind pools have done so, with the previous deals all pure indemnity and triggered only on a per-occurrence basis.

By making these changes the wind pools will have a more robust layer of protection for frequency events hitting the state of North Carolina, safe in the knowledge that catastrophe events must be large enough to create the $100m industry loss as well as cause indemnity losses to the covered parties.

The changes may also have enabled the coverage to be brought down a little in the overall reinsurance stack without raising the risk too much, while also enabling the expected loss figure to be kept more reasonable, evidenced by the attachment point being lower than in their previous transactions.

We understand that the notes issued by Tar Heel Re Ltd. will attach around the $2.025 billion mark and will provide cover on a pro-rata basis, depending on the size of the deal, up to an exhaustion point of $2.525 billion.

The initial probability of attachment for the notes is 2.08%, the initial exhaustion probability is 1.52% and the initial expected loss is 1.77%.

We understand the cat bond has been marketed at a size of $200m but demand thanks to current market conditions could well push this figure up. The deal aims to provide three years of cover, with maturity likely in May 2016 and will feature a reset of the aggregate qualifying losses on a yearly basis.

RMS are providing the risk modelling and to see them involved in a U.S. hurricane cat bond is quite a novelty after the way they dropped from sight following the release of RMS v11.

We’re told that the single tranche of notes are being marketed with a suggested price guidance of 9% to 10%.

Standard & Poor’s have given the Series 2013-1 notes to be issued by Tar Heel Re Ltd. a preliminary rating of ‘B+’. In their announcement on the rating, S&P said that the fact RMS are acting as risk modeller did create the need to assess this a little differently. S&P said; “Because of the significant difference between the AIR and RMS modeled losses, the stress rate applied to the aggregate exceedence probability curve was higher as compared to the indicative level for indemnified transactions set forth in our criteria.”

Update: Tar Heel Re Ltd. has increased in size by 150%, more than doubling up to $500m in size. This makes it one of the largest single tranches of cat bond notes issued.

The pricing on the transaction has dropped during marketing, with the expected range now 8.5% to 9%.

Update 2: The pricing on the Tar Heel Re Ltd. catastrophe bond eventually dropped to the bottom of the revised range and the transaction priced with a coupon of 8.5%.