The primary issuance catastrophe bond market sprung back to life this week as two new deals began marketing. We now have details on the first to share, a new transaction designed to support the North Carolina wind pools, the North Carolina Joint Underwriters Assn. (NCJUA) and the North Carolina Insurance Underwriters Assn. (NCIUA), with a source of hurricane reinsurance protection. The cover is afforded via a reinsurance agreement with Munich Reinsurance America.
The North Carolina based non-profit underwriting associations already have some cat bond protection still in play through the Johnston Re Ltd. (Series 2011-1) deal but their 2010 Johnston Re Ltd. deal matures in May of this year, so this latest cat bond seeks to replace and also augment that cover for them. The augmentation aspect comes through some structural differences in the deal related to the trigger and how a loss event qualifies. Tar Heel Re is the fourth cat bond these wind pools have benefitted from as there was also the Parkton Re Ltd deal in 2009.
As with the Johnston Re deals, Munich Reinsurance America are entering into a retrocessional reinsurance contract with the issuer, Tar Heel Re Ltd. but the 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 cat bond covers the reinsurance agreement between Munich Re America and the two non-profit wind pools.
What’s interesting about this cat bond is not just the fact that we see these non-profits coming back to utilise the capital markets for capacity for a fourth time, rather it is the change to the structure with a new way to qualify a storm as an event under the terms of the deal. All of the NCJUA / NCIUA cat bonds have been pure indemnity trigger deals, linked to the actual loss experience for storms affecting the state of North Carolina.
The Tar Heel Re 2013-1 cat bond issuance features a different way to define whether a storm is a covered event or not under the terms of the cat bond. Not only does it have to be a named storm which causes a loss to the covered book of business, we understand it also has to have been designated a catastrophe by Property Claims Services (PCS) and it has to have a PCS reported industry loss total of over $100m.
The transaction uses an annual aggregate structure, which is the first time these non-profit wind pools have done so, with the previous deals all structured as pure indemnity and triggered on a per-occurrence basis.
By making these changes the wind pools will have a more robust layer of protection for frequency events hitting the state of North Carolina, safe in the knowledge that they must be large enough to create the $100m industry loss as well as cause indemnity losses to the covered parties.
The changes may also have enabled the coverage to be brought down a little in the overall reinsurance stack without raising the risk too much, while also enabling the expected loss figure to be kept more reasonable, evidenced by the attachment point being lower than in their previous transactions. We understand that the notes issued by Tar Heel Re Ltd. will attach around the $2.025 billion mark and will provide cover on a pro-rata basis, depending on the size of the deal, up to an exhaustion point of $2.525 billion.
We understand the cat bond has been marketed at a size of $200m but demand, thanks to current market conditions, could well push this figure up. The deal aims to provide three years of cover, with maturity likely in May 2016 and will feature a reset of the aggregate qualifying losses on a yearly basis. Tar Heel Re Ltd. is a Bermuda domiciled special purpose insurer.
Another interesting aspect of this deal is that RMS are providing the risk modelling and to see them involved in a U.S. hurricane cat bond is quite a novelty after the way they dropped from sight following the release of RMS v11. It’s also the first deal they have worked on for the NCJUA and NCIUA as AIR Worldwide provided risk modelling on the three previous deals. It will be interesting to see how the deal performs at closing as it could be just what RMS needs to get them back in the cat bond issuance space for U.S. wind.
We’re told that the single tranche of notes are being marketed with a suggested price guidance of 9% to 10%, it will be interesting to watch how the deal performs at launch and whether pricing is impacted by demand and market appetite as has happened with most recent cat bonds.
Standard & Poor’s have given the Series 2013-1 notes to be issued by Tar Heel Re Ltd. a preliminary rating of ‘B+’. In their announcement on the rating, S&P said that the fact RMS are acting as risk modeller did create the need to assess this a little differently. S&P said; “Because of the significant difference between the AIR and RMS modeled losses, the stress rate applied to the aggregate exceedence probability curve was higher as compared to the indicative level for indemnified transactions set forth in our criteria.”
The other deal in the market involves another repeat sponsor, State Farm, who are bringing a Merna Re IV Ltd. cat bond transaction to market seeking $250m of U.S. earthquake protection. This will likely be designed to replace some of the protection afforded by Merna Reinsurance II Ltd., which was a pure earthquake cat bond, and possible the multi-peril Merna Reinsurance III Ltd. as well. We’ll bring you more on the Merna Re IV cat bond when we can source some more information.
Both transactions have been added to the Deal Directory and we’ll update you on them both as they come to market.