The North Carolina Insurance Underwriting Association (NCIUA) has returned to the catastrophe bond market for a second issuance in 2019, with a new $100 million Cape Lookout Re Ltd. (Series 2019-2) currently being offered to ILS investors.
The North Carolina Insurance Underwriting Association (NCIUA) is the coastal property insurance underwriting pool for the state and has been a user of capital markets backed reinsurance for a decade since its first cat bond Parkton Re Ltd. which it sponsored alongside the states Joint Underwriting Association.
Earlier this year the NCIUA visited the capital markets on its own, to sponsor a $450 million Cape Lookout Re Ltd. (Series 2019-1) cat bond transaction, as it expanded its use of the capital markets for reinsurance protection.
The NCIUA has now returned for a $100 million top-up to its catastrophe bond backed reinsurance protection, with this Cape Lookout Re 2019-2 transaction which is a riskier layer of its program.
It’s possible that the NCIUA has returned after finding the reinsurance market less attractive than expected at the renewals in 2019, resulting in the Association electing to sponsor a second catastrophe bond to top-up its reinsurance protection.
This $100 million Cape Lookout Re 2019-2 catastrophe bond again sees the NCIUA working alongside reinsurance firm Hannover Re who will front the capital markets on its behalf, seeking what is effectively an extension to the coverage provided by the first Cape Lookout Re deal, given the similarity of coverage and terms.
The cat bond is slated to provide the Association with a $100 million or greater source of fully collateralized reinsurance protection, on an indemnity and annual aggregate basis across a three-year term.
The coverage is for certain losses from named storms and severe thunderstorms to the NCIUA’s portfolio in the state of North Carolina.
Cape Lookout Re Ltd., a Bermuda special purpose insurer, will issue a single $100 million tranche of Series 2019-2 Class A cat bond notes which will be sold to capital market investors and the proceeds used to collateralize the NCIUA’s underlying reinsurance needs.
The reinsurance will be serviced via Hannover Re, acting as the ceding reinsurer. The German reinsurance firm will enter into a reinsurance agreement with the NCIUA and a retrocession agreement with Cape Lookout Re Ltd., to complete the financing of the coverage and the transfer of the risks.
While the coverage details are the same, the risk level associated with this second Cape Lookout Re cat bond of 2019 is very different.
The 2019-1 issuance attached at $1.75 billion of losses to the NCIUA, covering a percentage of losses up to $2.25 billion.
This new 2019-2 cat bond is slated to attach below that at $1.3 billion of losses to the NCIUA, covering a $300 million layer up to $1.6 billion. That leaves room for this cat bond to increase in size from the $100 million launch, should investor appetite prove strong and pricing attractive.
As a result, the initial expected loss of the $100 million of Series 2019-2 notes to be issued by Cape Lookout Re is 2.52%, while the price guidance is put in a range from 6.75% to 7.75%.
For comparison, the 2019-1 lower risk notes had an initial expected loss of 1.61% and priced at 4.25%.
It’s good to see the NCIUA return for a second cat bond this year, as it demonstrates the effectiveness of the coverage, that market conditions are still conducive to sponsors despite higher pricing, and that the insurance-linked securities (ILS) market remains cost-comparable to reinsurance more broadly, making this deal attractive to enter into for the NCIUA.
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