The trend for recent catastrophe bonds to see very attractive terms and pricing continues with North Carolina wind pools, the North Carolina Joint Underwriters Assn. (NCJUA) and the North Carolina Insurance Underwriters Assn. (NCIUA), Tar Heel Re Ltd. (Series 2013-1) cat bond. As insurance linked securities (ILS) investors demonstrate once again their strong appetite for new deals, the transaction increased in size by 150%, more than doubling from $200m to $500m.
Tar Heel Re 2013 is the fourth cat bond that the North Carolina wind pools have participated in, following on from Parkton Re Ltd in 2009, Johnston Re Ltd. in 2010 and Johnston Re Ltd. (Series 2011-1) a year later. Tar Heel Re Ltd. will replace and augment the cover provided by the first Johnston Re deal, which is scheduled to mature in May this year.
Tar Heel Re sees Munich Reinsurance America enter into a retrocessional reinsurance contract with the issuer, Bermuda SPI Tar Heel Re Ltd., but the hurricane reinsurance cover is linked to the actual loss experience of the NCJUA and NCIUA rather than Munich Re’s own exposure in North Carolina. So the proceeds of the cat bond sale collateralizes and covers the reinsurance agreement between Munich Re America and the two non-profit wind pools.
As we said in our article on this deal when it launched, the Tar Heel Re cat bond structure uses some interesting features to define what constitutes a qualifying hurricane event. For a storm to qualify it has to be named as a tropical storm or hurricane and also be designated a catastrophe by Property Claims Services (PCS) and have a PCS reported industry loss total of over $100m. This structure has enabled the wind pools to get an aggregate cat bond to market by reducing any concerns over smaller storms eating into the aggregate limit over each annual term.
The Tar Heel Re cat bond began marketing as a $200m single tranche of notes. Market sources told us that the tranche has grown and is now being marketed, thanks to significant investor demand we’re told, at an expected size of $500m. That makes this cat bond one of the largest single tranche of cat bond notes ever recorded.
Further demonstrating ILS investors willingness to take on catastrophe risk, the Tar Heel Re coupon pricing has dropped below the original expected range. Tar Heel Re was marketed with an expected coupon range of 9% to 10%, but is now being marketed with a range of 8.5% to 9%. The transaction has not yet priced, that is expected to happen later this week, so there could be room for this to reduce further given the current market appetite as evidenced by Everglades on Friday.
Tar Heel Re continues the trend for reductions in coupon pricing and sponsors being able to secure extremely good terms on cat bond coverage. We’ll update you as the deal moves towards completion.