Queen Street VIII Re Ltd.

Queen Street VIII Re Limited is a recently registered Bermuda domiciled special purpose insurer which will issue a single tranche of catastrophe bond notes. The sale of the notes will provide a source of fully-collateralized, retrocessional reinsurance protection to Munich Re for the perils of U.S. hurricanes and Australian cyclones.

We’re told that the deal is being marketed with a suggested size of $75m, but clearly given the appetite for new cat bond issues that could grow.

We understand that the coverage provide by Queen Street VIII Re will be on a per-occurrence basis over three years and that both 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 weighted modelled industry loss index.

Hurricane coverage is for personal, commercial and auto losses in the U.S. states of Alabama, Arkansas, Connecticut, Delaware, District of Columbia, 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, West Virginia.

Australian tropical cyclone coverage is for the whole Commonwealth of Australia, for residential, commercial, agricultural and auto lines of business.

Interestingly, these two perils 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.

The way the deal is structured Australian cyclone risk actually makes up just over half of the first years expected loss calculation.

When AIR performend historical event scenario modelling for this deal, one hurricane caused losses to the notes, the 1926 unnamed Florida storm could have caused a loss of 35% of the notes principal. Australian Cyclone Tracy in 1974, the only Australian historical storm that would have threatened the notes, could have caused a complete loss of principal for noteholders on a modelled basis.

We’re told that the attachment probability for the notes is 3.91%, the exhaustion probability is 1.88% and the expected loss is 2.72%. The expected coupon price guidance range is from 6.75% to 7.5%.

Proceeds of the sale of the notes will be invested in highly rated U.S. treasury or money-market funds

Update: The price guidance on this issuance dropped to below the lower end of the marketed range to 6.5% to 7% before the deal priced.

Update 2: Before this deal closed the pricing dropped again to finish at the bottom of the adjusted range at 6.5%.

The initial expected loss for the notes is 2.72% so pricing was at a multiple of approximately 2.4 times expected losses.

Sponsor Munich Re said that investors appreciated the diversifying effect of Australian cyclone risks in this cat bond.

Munich Re Board member Thomas Blunck said; “Munich Re has again used the current market environment to acquire coverage for the peak risk US hurricane and included Australian cyclone risk for the first time for protection of our own book. The response by investors has been positive. Investors appreciate the transparent risk/return profile and the diversifying effect of Australian cyclone exposure.”

Munich Re explained that the deal provides cover for extreme events with a statistical return period of between 65 and 80 years per event. The Australian cyclone coverage is largely focused on exposures in the territory of Queensland which constitute the majority of the initial expected losses for that peril.