Queen Street X Re Limited (2015)

Munich Re is trying again to secure a capital markets backed source of fully-collateralized reinsurance protection for certain U.S. hurricane and Australian cyclone risks through this Queen Street X Re Ltd. 2015 issuance.

In 2014 the reinsurer failed to complete issuance of another Queen Street X Re cat bond due to a failure to secure the necessary capacity after the target price could not be met.

The issuance will see a single tranche of notes offered to investors by the Irish domiciled SPV Queen Street X Re Limited, with a current deal size mooted of $100m, according to sources. The notes will be exposed on a per-occurrence basis to U.S. hurricanes using an industry loss trigger and Australian cyclones using a modelled loss trigger.

The triggers used are the same as previous Queen Street cat bonds, a county and line of business weighted PCS industry loss index for U.S. hurricanes and a postcode as well as line of business weighted modelled industry loss index for Australian cyclone risks.

The 2015 Queen Street X Re cat bond issuance will afford Munich Re with protection for three U.S. hurricane and three Australian cyclone seasons, with the hurricane cover running to December 2017 and Australian cyclone to the end of May 2018.

The covered area for U.S. hurricane risks is all exposed states, including Florida and some inland states where hurricanes may still cause major impacts as they move inland. Australian cyclone protection if for the entire Commonwealth we understand.

In terms of attachment probability, the initial base probability is 3.47%, while the exhaustion probability is 1.89% and the expected loss 2.54% (2.72% on a WSST basis). Interestingly this cat bond is weighted towards the Australian cyclone risk, with that peril making up over 55% of the initial expected loss, we’re told.

In fact the expected loss for the hurricane exposure is 1.05% initially, while the Australian cyclone peril is 1.51%. That’s a different mix to the previous Queen Street X Re attempted issue, hurricanes made a larger contribution to the expected loss of that deal which cyclone was around the same, suggesting perhaps that Munich Re sees an opportunity and need to better protect itself against Australian cyclone risks.

The pricing for this transaction is launching with guidance of 5.5% to 6% above the collateral money market fund return. That would imply a multiple in the range of 2.1 to 2.4 times the expected loss on a base case.

The Queen Street X Re cat bond from last year that failed to complete offered a multiple which at the mid-point would have been less than 2 times the expected loss. With the market having failed to be receptive to that transaction it looks like Munich Re is coming back with something much more attractive for investors and aligned with other cat bonds of late.

Update 1:

This cat bond priced at 5.75%, so right on the mid-point of guidance, which will provide investors a multiple of 2.25 times the base expected loss, or 2.11 times the sensitivity case.