Cape Lookout Re Ltd. (Series 2022-1)

This will be the fourth Cape Lookout Re Ltd. catastrophe bond issued for the North Carolina Insurance Underwriting Association (NCIUA) and at least a partial replacement for the recently matured $450 million Cape Lookout Re Ltd. (Series 2019-1) transaction.

Cape Lookout Re Ltd., the Bermuda special purpose insurer, will issue a single, preliminarily sized $300 million tranche of Series 2022-1 Class A notes, sources told Artemis.

These notes will be sold to cat bond investors and the proceeds used to collateralize a retrocessional reinsurance agreement between Cape Lookout Re Ltd. and fronting reinsurer Hannover Re, which will in turn enter into a reinsurance agreement with the NCIUA to pass on the coverage.

The cat bond will ultimately provide the NCIUA with a three year source of collateralized reinsurance against losses from named storms and severe thunderstorms that impact the state of North Carolina.

The coverage will be structured using an indemnity trigger and be afforded on an annual aggregate basis.

This new Cape Lookout Re 2022-1 catastrophe bond will see its reinsurance coverage attach at $1.85 billion of losses and exhaust at $2.55 billion of losses, so covering a percentage of a wide $700 million layer of the NCIUA’s reinsurance program, offering ample room for this issuance to upsize, if market conditions are conducive.

As a result, the currently $300 million of Series 2022-1 Class A notes will come with an initial attachment probability of 1.97%, an initial expected loss of 1.54% and they are being offered to cat bond investors with price guidance in a range from 4.5% to 5%, we’re told.

That’s a relatively similar level of risk to the recently matured 2019-1 cat bond from Cape Lookout Re, so this new issuance should fill gaps in the NCIUA reinsurance tower that its maturity created.

The pricing also looks a little higher than the 2019 cat bond, which should please investors and cat bond fund managers.

For comparison, the Cape Lookout Re 2019-1 cat bond had an initial expected loss of 1.61% and priced at 4.25%, so offered investors a multiple-at-market of 2.64 times the EL.

This new 2022-1 cat bond, with its expected loss of 1.54% and coupon at the mid-point of 4.75% could offer a base multiple of around 3 times, reflecting the fact the cat bond market is a little firmer now than in 2019, but still offering well-priced coverage.

Update 1:

We understand the NCIUA is now targeting between $325m and $350m of reinsurance protection from this new catastrophe bond issuance.

While likely to upsize, the pricing has now been fixed at the upper-end of guidance, with the notes set to pay a coupon of 5%.

Update 2:

This transaction eventually closed at $330 million in size, so missing the revised upper-target, with the coupon priced at the already fixed 5%.