The world’s largest reinsurance company Munich Re has issued a statement regarding the successful completion of its latest catastrophe bond transaction, Queen Street VIII Re Limited. The cat bond is Munich Re’s seventh in the Queen Street series since 2011 and eighth Queen Street cat bond in total, the first was back in 2008.
Queen Street VIII Re is the first catastrophe bond in the Queen Street series to feature Australian cyclone risk as one of the perils securitized. Now that it has completed it becomes the only outstanding catastrophe bond to contain Australian cyclone risk as a securitized peril.
The Queen Street VIII Re cat bond provides Munich Re with a fully-collateralized source of retrocessional reinsurance protection for U.S. hurricanes and Australian cyclones. Cover for both perils is on a per-occurrence basis and the cat bond uses a type of industry loss index trigger. U.S. hurricane risks will use 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.
The deal involved a single tranche of notes being issued providing $75m of protection to Munich Re for the covered perils. The deal is comparable to other Queen Street cat bonds and it was structured and arranged by Munich Re. The cat bonds term runs until maturity on the 8th June 2016, so providing three years of cover.
Munich Re said 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.
The transaction launched with price guidance of 6.75% to 7.5%. That interest spread was subsequently tightened down to 6.5% to 7% before the deal eventually priced at the lower end of guidance at 6.5%. That’s a reduction in pricing of 8.8% from the mid-point of the original range which is a healthy saving for Munich Re. The initial expected loss for the notes is 2.72% so pricing was at a multiple of approximately 2.4 times expected losses.
Munich Re said that it placed the Queen Street VIII Re cat bond with a broadly diversified group of international investors. Including this transaction, Munich Re has been involved in bringing $1.2 billion of risk capital to capital markets investors for its clients in just the last six months.
Munich Re Board member Thomas Blunck commented on the deals completion; “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.”
It’s encouraging to hear that investors readily accepted what is a less familiar peril in the catastrophe bond market, particularly as it uses a modelled industry loss trigger. If a transaction is well structured and the trigger as transparent as possible with investors being furnished with as much supporting information as can be provided investors seem ready to allocate capital to more diversifying risks on a modelled loss basis. We hope the successful completion of this deal stimulates other sponsors to investigate transferring more Australian cyclone risk to the cat bond market.
The $75m of notes issued by Queen Street VIII Re Ltd. were admitted for listing to the Bermuda Stock Exchange. The listing was sponsored by Prime Management.