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Original Risk: A Society for Change Agents

Cat bonds instrumental in transforming MPIUA’s reinsurance cover


For the Massachusetts Property Insurance Underwriting Association (MPIUA), which recently completed its second catastrophe bond Cranberry Re Ltd. (Series 2015-1), the capital markets and ILS investors have been instrumental in transforming its reinsurance protection.

“Catastrophe bond capacity has been instrumental this year in MPIUA’s transformation from a per occurrence to annual aggregate risk transfer program,” commented John Golembeski, President of the MPIUA.

The $300m Cranberry Re 2015-1 cat bond provides the MPIUA with annual aggregate reinsurance protection against losses from tropical cyclones, tropical storms, hurricanes, severe thunderstorms and winter storms.

In order for an event to qualify if must cause at least $10 million in losses to MPIUA. The cat bond provides three years of reinsurance protection, attaching when MPIUA’s annual aggregate losses exceed $300 million, and exhaust when MPIUA’s annual aggregate losses exceed $1.4 billion.

GC Securities, the capital markets and investment banking unit of reinsurance broker Guy Carpenter, acted as sole structurer and sole bookrunner for the Cranberry Re cat bond transaction.

David Priebe, Vice Chairman of Guy Carpenter, commented; “We are proud to have assisted MPIUA in the execution of its second catastrophe bond, which exemplifies the benefit of the convergence between the reinsurance and capital markets. This transaction demonstrates Guy Carpenter’s and GC  Securities’ expertise, as well as our commitment to assisting residual market insurers and other public entity clients in navigating and understanding innovative forms of risk transfer, and to finding the optimal form of risk mitigation from the vast array of potential solutions across all markets.”

Hannover Rück SE acted as a transformer reinsurer, thereby facilitating MPIUA’s access to the capital markets.

Ulrich Wallin, CEO of Hannover Re, added; “We are delighted that MPIUA has elected Hannover Re as its partner for transforming its second cat bond transaction. It demonstrates that Hannover Re can offer its trusted insurance clients the full suite of services, which will help us in strengthening our overall relationship with valued clients like MPIUA.”

Cranberry Re is the second time that the MPIUA has accessed the capital markets for cat bond capacity, the first being the 2010 cat bond Shore Re Ltd. GC Securities noted that Cranberry Re is the first catastrophe bond benefiting a residual market insurer that covers the sponsor for losses from multiple natural perils.

It is more typical for residual market insurers to seek single peril coverage, typically hurricane, named storm or perhaps earthquake, as many are established to provide protection for specific peak zone risks.

Golembeski, President of the MPIUA, explained some of the benefits, as well as achieving aggregate reinsurance protection, that the Cranberry Re cat bond provides; “In addition to diversifying counterparties and providing incremental capacity as we increased the limit we purchase with the change to an annual aggregate format, the catastrophe bond capacity provides key pricing guidance relative to traditional reinsurance pricing in order to achieve a cost-effective annual aggregate program. We value our key partners, Guy Carpenter, GC Securities and Hannover Rück SE, in order to achieve these results.”

The aggregate nature of the reinsurance coverage better protects the MPIUA against frequency losses, so smaller events can accumulate towards the trigger of the protection. For a multi-peril transaction for a residual market insurer, like the MPIUA, this will be a much more effective solution than just having occurrence cover for very large storm impacts.

Cory Anger, Global Head of ILS Structuring at GC Securities, said about the completion of the Cranberry Re cat bond; “We are honored to have brought MPIUA back to the catastrophe bond market and utilized catastrophe bond capacity to achieve MPIUA’s stated goals as MPIUA changed its reinsurance program to an annual aggregate structure.”

Anger explained that with Cranberry Re the MPIUA has gained access to some of the new structural features that recent cat bonds offer to sponsors; “The Series 2015-1 bonds (as well as the Cranberry Re shelf program) provide the novel structural features to MPIUA, including the flexibility in how MPIUA can annually reset the layer and liquidity features that advance expected next 30 days’ worth of claims.”

Also of note, according to Anger, is the fact that ILS investors have accepted MPIUA providing its own catastrophe designation, rather than using a third-party as is sometimes common; “As the first multi-peril residual market insurer catastrophe bond, MPIUA also did not have to utilize third party identification sources for identifying severe thunderstorms or winter storms. Instead, investors accepted MPIUA’s catastrophe code strategy, thereby removing a source of expense and complexity and bringing catastrophe bonds closer to traditional reinsurance structures.”

Chi Hum, Global Head of ILS Distribution at GC Securities, commented on the response from investors to the cat bond; “The capital markets investors were pleased to see MPIUA come back to the cat bond market after a hiatus of several years. The Massachusetts-only risk profile of these bonds is particularly useful for portfolio construction purposes and drove the strong support of the Series 2015-1 Cranberry Re Ltd. bond issuance. GC Securities is pleased to be able to bring the capital markets capacity and the value of diversification and collateralization to a well-structured reinsurance program.”

In 2015 insurers are finding catastrophe bond protection more flexible, more comparable with traditional reinsurance, and often more cost-effective. As insurers increasingly seek to shift towards aggregate reinsurance towers, the use of multi-year protection from the capital markets in catastrophe bond form is likely to continue.

You can read all about the Cranberry Re Ltd. (Series 2015-1) catastrophe bond in the Artemis Deal Directory.

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