The world’s largest reinsurance company Munich Re is back with its tenth catastrophe bond under the Queen Street naming convention, Queen Street X Re Limited, its third cat bond to include Australia cyclone risk alongside U.S. hurricanes.
Munich Re often brings a new Queen Street cat bond issuance to market around this time, syncing up with a July renewal, or perhaps preferring to avoid the pre-June glut of cat bond issuance. The reinsurers tenth Queen Street cat bond is a similar issue to its previous two, Queen Street IX Re Ltd. from February 2014 and Queen Street VIII Re Ltd. from June 2013, containing the same perils and the same triggers used, Artemis understands.
Queen Street X Re Limited is again an Irish domiciled special purpose vehicle, the second in the series to be located in Europe closer to the reinsurers home territory. Munich Re is again seeking further capital markets participation in its retro program at a similar attachment probability to its previous two Queen Street cat bonds. We’re told that the deal is being marketed without a target size at this time.
With this Queen Street X Re cat bond Munich Re is seeking a source of fully-collateralized retrocessional reinsurance protection from U.S. hurricanes and Australian cyclones. The protection provided by Queen Street X Re will be on a per-occurrence basis, as were the previous two Queen Street’s, and the same triggers will be used, a county and line of business weighted PCS industry loss index for U.S. hurricanes and a postcode as well as line of business weighted modelled industry loss index for Australian cyclone risks.
The retrocessional coverage from Queen Street X Re will benefit Munich Re for three hurricane seasons, up to the end of 2016 and to May 2017 for Australian cyclone risks, so covering three cyclone seasons which run from November to April.
The probabilities of attachment, exhaustion and expected loss for Queen Street X Re are very similar to the previous two cat bonds from Munich Re, which makes it a useful deal for pricing comparison purposes. The initial attachment probability is said to be 3.92%, the exhaustion probability is 1.91% and the expected loss 2.72%. The expected loss is identical to Queen Street IX and Queen Street VIII.
As we understand it, there are no significant historical hurricane or cyclone events which would have caused a sufficient industry loss to trigger this cat bond, showing that it is a remote risk. We’re told that U.S. hurricane risk contributes just over half of this cat bonds expected loss, where as the Queen Street IX was slightly more exposed to Australian cyclones.
The price guidance on the Queen Street X Re Ltd. cat bond is reflective of the decline in catastrophe reinsurance pricing globally, with this deal launching with guidance of 4.75% to 5.5%. That compares to final pricing of 6.5% for Queen Street VIII Re a year ago and 5.5% for Queen Street IX Re in February.
The multiple tells the story of catastrophe bond market pricing declining over the last twelve months. A year ago, Queen Street VIII had a multiple of 2.4 times expected loss. In February the multiple dropped to 2.02 times expected losses. Now, the latest deal if it priced at a mid-point could see the multiple of expected loss to coupon drop below 2 times which is low for any cat bond.
So it will be interesting to see where this deal prices, as that will demonstrate whether ILS investors are willing to go even lower in terms of return on a cat bond containing a less frequently transferred peril of Australian cyclone, or whether they will demand a coupon in the upper end of guidance as has been seen on other recent deals. It will also be interesting to see whether the demand for a diversifying peril, in the Australian cyclone risk, is enough to bring the pricing down.
Munich Re is itself the sole structurer for its tenth Queen Street cat bond, we understand, while Deutsche Bank Securities is taking bookrunner duties. AIR Worldwide is providing risk modelling and calculation agent services.
That’s all the detail we have on this latest catastrophe bond to come to market.