Northshore Re Limited (Series 2013-1)

Northshore Re Limited is a Bermuda domiciled special purpose insurer which was added to the Bermuda register on the 24th of June. Northshore Re has been set up as a program and in this first issuance will place a single tranche of cat bond notes with investors to provide AXIS Capital subsidiary companies with a source of collateralized, capital market backed reinsurance protection. It is the first time AXIS Capital has issued a catastrophe bond.

The transaction will ultimately protect a range of AXIS Capital subsidiaries, including (but not limited to) AXIS Specialty, AXIS Reinsurance, AXIS Insurance and AXIS Surplus. The Northshore Re cat bond will protect these AXIS Capital subsidiaries with a multi-year source of U.S. hurricane and earthquake reinsurance.

The deal is being marketed offering a single tranche of Series 2013-1 Class A notes with a deal size of $150m, as with any cat bond that is a preliminary size and could grow. The cover provided to AXIS by the Northshore Re catastrophe bond will be on an annual aggregate basis using a PCS industry loss index which will be state-weighted and scaled by factors that depend on the state and are roughly proportional to AXIS’s market share.

With this cat bond AXIS is looking for three years of protection. The hurricane protection is for the usual U.S. wind exposed states from the Gulf Coast round to the northeast. Earthquake coverage is for the entire U.S.

Hurricane coverage is for losses in the states of Alabama, Arkansas, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, 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. Losses from earthquakes are covered across all 50 states and the District of Columbia.

Based on AIR’s analysis, on a historical basis, there have been two years—1812 and 1906—that would have caused a modeled loss in excess of the attachment level. The 1812 events were the New Madrid earthquakes and the 1906 was the San Francisco earthquake.

Standard & Poor’s noted: AIR’s inclusion of 10% of storm-surge losses might understate actual losses given that approximately 50% of the exposure in this deal comes from commercial policies, and flooding is commonly covered in this.

The Northshore Re cat bond will provide its protection from an attachment point of $1 billion to an exhaustion point of $1.2 billion and that qualifying catastrophe events will only accumulate aggregate losses after a deductible of $50m is cleared. The attachment probability works out at 2.43% and the expected loss at 2.07%.

Hurricane risks contribute 67% of the expected losses, with Florida and Texas the states with the most exposure. Earthquake risk is largely focused on California.

At each of two annual resets, AXIS will be able to update the payout factors and the franchise deductible amounts subject to the conditions that no factor can exceed 40% and the franchise deductible must be at least $40m. The attachment point and exhaustion points will then be set to keep the probability of attachment and expected loss at 2.43% and 2.07%, respectively.

Pricing wise sources explained that the deal was launched offering a coupon at a range of 7.5% to 8.5%.

The collateral from the sale of the Northshore Re cat bond notes will be deposited in a collateral account and invested in U.S. Treasury money market funds.

Update: This cat bond increased in size by 33% to $200m during the marketing phase. At the same time, the price guidance was reduced by almost 8% to a range of 7.25% to 7.5% before its close.

Update 2: The pricing on the Northshore Re cat bond settled at the lowest end of the already reduced range, offering investors a coupon of 7.25%.