Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Munich Re’s Queen Street III Capital Ltd. catastrophe bond starts marketing


As we reported two days ago, Munich Re are returning to the catastrophe bond market with their latest Queen Street transaction, to secure themselves additional European windstorm cover. The cat bond will be issued by their Queen Street III Capital Ltd. special purpose vehicle, which was recently incorporated in Dublin, Ireland. The transaction is now officially marketing and has received a preliminary rating from Standard & Poor’s.

Queen Street III Capital Ltd. will issue $50m of notes in a single tranche which aim to provide Munich Re with cover on a per-occurrence basis over a three-year period against certain European windstorms. The deal is expected to complete during the month of July and expected maturity is in July 2014, with the chance to extend for losses to develop in three-month increments for up to two years.

The notes cover major windstorms in the following countries; Belgium, Denmark, France, Germany, Ireland, Luxembourg, The Netherlands and the UK. For a windstorm event to qualify under the terms of the cat bond deal and hit the industry loss trigger point, they must result in an index value of above 10,000 up to an index value of 15,000. The index will be calculated by risk modeller AIR Worldwide using industry loss data provided by PERILS AG, enhanced by industry exposure data provided by AIR Worldwide.

Each year Munich Re can choose whether to reset the windstorm payout factors while the industry exposure data must be reset. AIR Worldwide will reset attachment and exhaustion points annually on the 15th June so that the new attachment probability and expected loss are equal to or less than the initial one-year attachment probability and the initial one-year expected loss for Europe windstorm. Interestingly there is a reset limitation which means that the contribution to the expected loss for storms hitting France, Germany and the UK combined cannot be less than 70%.

Another interesting point raised in the S&P report for this deal is that storm surge is a significant risk to European windstorm cat bonds. They point out that of the 299 modelled storms 13 would have caused a principal loss to this cat bond through storm surge damage affecting the UK. Something for issuers and risk modelling firms to consider as storm surge is not well modelled across Europe.

As we noted in our article on Queen Street III Capital the other day, Munich Re have established a new collateral fund specifically for this transaction. MEAG Queen Street III, which will be managed by a Munich Re subsidiary, was rated by S&P two days ago and is destined to hold the collateral for this transaction which will comprise highly rated U.S. Treasury bills.

The single tranche of $50m of insurance-linked notes being issued by Queen Street III Capital Ltd. have received a preliminary rating of ‘B+’ from Standard & Poor’s.

Given that this cat bond offers a timely diversification opportunity for investors away from the market dominating U.S. hurricane risk it is likely to be oversubscribed. That could give Munich Re a chance to upsize the deal should they wish to.

This transaction will be added to our catastrophe bond Deal Directory and we’ll update you as it progresses.

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