North Carolina’s Joint Underwriting Association and Insurance Underwriting Association issued $500 million Series 2013-1 notes via a new catastrophe bond shelf program, Tar Heel Re.
This is the fourth time that the associations have tapped the cat bond market to manage tropical cyclone risks but the first time they have used an annual aggregate structure.
The transaction's annual aggregate structure sums up all of the qualifying events that have occurred and an aggregate of these losses must meet the event to cause a trigger under the Cat bond transaction. It provides more value because it’s covering not severity but severity in conjunction with aggregation of events breaching the trigger level, explained Cory Anger, global head of ILS Structuring, GC Securities, the bookrunner, structuring agent and co-lead manager on the deal.
Munich Re co-structured and co-lead managed the deal. Standard & Poor’s assigned a preliminary rating of ‘B+’ to the notes, which priced with a coupon of 8.5%.
Gina Schwitzgebel, general manager at NCJUA / NCIUA, said that the deal is the largest bond the North Carolina Associations have issued in the capital markets and it priced at costs lower than the previous cat bonds they issued.
“In general the annual aggregate bonds that have been used before have been viewed as less preferable by the market,” said Anger. “The fact that the North Carolina wind pools were able to use this very cost effectively shows that the capital markets are willing to provide annual aggregate cover in this market.”
Unlike the other deals that the issuer has come to market with, the Series 2013-1 notes are structured with an expanded definition of “Named Storm” that moves beyond just hurricane-related losses. Anger explained that the deal also covers tropical storms or tropical cyclones, as long as they are a “named storm” by the National Hurricane Center – so there is more coverage by increasing the type of tropical cyclone that can be covered under the transaction.
The new bonds will sit below the existing $201.835 million per occurrence Series 2011-1 Class A and B Notes issued in 2011 from the NCJUA/NCIUA’s prior cat bond facility, Johnston Re Ltd. The attachment levels of these bonds are at $2.025 billion mark and exhaust at $2.525 billion. Anger explains that in this latest deal, the amount of losses needed in order to qualify for getting paid under this protection are lower relative to the amount of losses needed to trigger the protection than seen in the issuer’s previous deals.
Collectively, the NCJUA/NCIUA will have $701.835 million of catastrophe bond protection outstanding for the 2013 hurricane season.
Catastrophe bonds are used to raise funds to reimburse insurers for claims they pay out in the event of a pre-defined catastrophe such as a hurricane or earthquake. If certain triggers are met, investors can forfeit both their interest and principal. According to Anger, the market right now has $1.6 billion of property and catastrophe CAT bonds closed to date and there are two other transactions that are currently being marketed that are not included in that figure.