N.C. Windpool Cat Bond Transaction May Draw New Players to the Market

A new $305 million catastrophe bond program to benefit the North Carolina Joint Underwriting Association and the North Carolina Insurance Underwriting Association has a couple of unique features that are likely to tempt other entities into the cat bond market, said Cory Anger, Global Head of Industry Linked Securities Structuring for GC Securities.

The cat bond program, Johnston Re Ltd., a Cayman Islands exempted company licensed as a Class B insurer, follows the NC JUA/IUA's first cat bond transaction in 2009, Parkton Re.

The Johnston Re bond, which includes $200 million in the Class A notes and $105 million in the Class B notes, sits on top of the $200 million Parkton Re bond. Together, both programs provide the JUA/IUA with $505 million in catastrophe bond protection to manage its hurricane risk for the 2010 hurricane season.

The Johnston Re bond incorporates a drop-down feature so the Class A bonds would replace the Parkton bonds when they mature in 2011. It's the first time a cat bond has had a nonevent, time-activated drop-down feature. This includes a provision to raise the coupon on those bonds to reflect the higher level of risk when they replace the Parkton bonds at a predefined rate, Anger said.

Parkton Re was a two-year transaction. Johnston Re is a three-year transaction.

"After the Class A notes drop down, they provide two-years' worth of capacity to replace Parkton Re at the current, attractive rates," Anger said.

Also, the cat bond lowered the retention required by the sponsor. Traditionally, sponsors have been expected to retain 10% of the risk layer in the catastrophe bond market. With the Johnston Re transaction, the NC JUA/IUA will retain just 5% of the risk layer.

Investors of cat bonds like to see the sponsor retain some risk, so they have a financial incentive to not overpay in the claims adjustment process, Anger said.

The Johnston Re cat bond, which was originally expected to be $200 million, was increased to $305 million due to investor interest.

The improvements in the cat bond structure are likely to be used again, she said.

"Features in both Johnston Re and Parkton Re should further incent existing users and new users to access the capital markets," Anger said.

Guy Carpenter & Co. and GC Securities assisted the NC JUA/IUA in securing the transforming reinsurer, Munich Re America, and facilitating the transfer of the catastrophe risk to Johnston Re Ltd. GC Securities also served as sole bookrunner and co-lead manager on the note issuance as well as joint structuring agent of the catastrophe bond program.

Last July, when Swiss Re and GC Securities, a division of MMC Securities Corp., announced the $200 million Parkton Re transaction, they said it's the first time a state residual windpool has used a cat bond for hurricane risk, and also the first time a cat bond was done specifically for North Carolina hurricane risk (BestWire, July 13, 2009).

Munich Re America Group currently has a Best's Financial Strength Rating of A+ (Superior). Swiss Re America Group currently has a Best's Financial Strength Rating of A (Excellent).

(By Meg Green, senior associate editor, BestWeek: [email protected])