Just when we thought the primary market for catastrophe bond and insurance-linked securities issuance was getting quiet a transaction comes along in the form of reinsurer Munich Re’s latest Queen Street deal. Queen Street VI Re Ltd. has just begun marketing and with this, their sixth Queen Street cat bond Munich Re are seeking cover for the peak perils of U.S. hurricane and European windstorm risks on an industry loss basis.
It’s quite unusual to see a cat bond come to market containing U.S. hurricane risks at this time of year so it will be interesting to see how well investors react to it and also how the deal prices (sources tell us somewhere around 11% is likely). Munich Re have successfully issued some U.S. hurricane risks in July before back in their 2011 Queen Street III transaction.
Queen Street Re VI Ltd., a Bermuda domiciled special purpose insurer, has been formed to issue catastrophe bond notes designed to provide Munich Re with a source of fully-collateralized retrocession reinsurance coverage providing protection on a per-occurrence basis for U.S. hurricane risks from 1st August 2012 to 31st March 2015 and European windstorm risks from October 2012 and 31st March 2015.
The transaction will rely on industry loss index triggers created by PCS for U.S. hurricane risks and PERILS for European windstorm. The PCS index will be county and line of business weighted while the PERILS index is Cresta weighted. AIR Worldwide will provide risk modelling and calculation services to the transaction.
Coverage for U.S. hurricanes is for almost every state with exposure to hurricanes along the eastern and Gulf coasts, including Florida. European windstorm coverage is for much of north-west Europe. Full details on the covered areas can be found in our Deal Directory entry for Queen Street VI Re.
The notes will cover losses between the hurricane index value attachment point of 84,000 and the hurricane index value exhaustion point of 130,000, and losses between the European windstorm index value attachment point of 13,000 and the European windstorm index value exhaustion point of 17,500. Both index values are calculated on a per-occurrence basis.
AIR Worldwide will calculate an index value after being notified of a qualifying event. The index value for U.S. hurricane risks will be based on industry losses reported by PCS by state and line of business, which AIR will disaggregate to county using its modeled industry loss allocation and predetermined payout factors by county and line of business. The index value for the European windstorm risk will be based on industry losses reported by PERILS AG and predetermined payout factors by CRESTA zone, including constant exchange rates for Denmark, the U.K., Norway, Sweden, and Switzerland.
The deal features an annual reset to allow Munich Re to reset payout factors and there are limitations for certain covered areas as to how much they can contribute to expected losses so as to prevent the deals risk becoming weighted to one region, for example Florida.
Based on historical analysis by AIR Worldwide there has only been one historic hurricane event which would have reached the index attachment point. The 1926 NoName6 hurricane which impacted Florida and Alabama would have caused a loss to noteholders of approximately 37% of the notional balance of the notes. There have been no historic European windstorm events which would have breached the index attachment point.
Collateral from the sale of the catastrophe bond notes issued by Queen Street VI Re Ltd. will be deposited in a collateral account and then transferred to a specially established Treasury money market fund, MEAG Queen Street VI fund. Munich Re have chosen to set up a special dedicated fund for their last few cat bonds so that it can totally control the return of the collateral rather than investing it via other TMMF funds. Standard & Poor’s gave the MEAG Queen Street VI fund a ‘AAAm’ rating.
Standard & Poor’s have given the single tranche of notes to be issued by Queen Street VI Re Ltd. a preliminary rating of ‘B’.
It will be interesting to see how big this deal gets. Munich Re typically don’t issue huge cat bonds anyway but the successful isssuance of such a broad U.S. hurricane exposed cat bond at this time of year will be further evidence of the appetite of investors for access to insurance risk.