North Carolina expands hurricane cover with extra layer of risk

May 11 - Johnston Re, the U.S. hurricane catastrophe bond for the North Carolina Joint Underwriting Association (NCJUA) and the North Carolina Insurance Underwriting Association (NCIUA), closed on Monday at $305 million.

Munich Reinsurance America purchased reinsurance from Johnston Re in a two-note transaction, transforming the proceeds of the bond issue into a reinsurance agreement for the two North Carolina Associations.

Insurers and reinsurers use cat bonds to transfer to capital market investors major risks on their books, such as for storms and earthquakes, freeing up capital to underwrite new insurance business.

Johnston Re Ltd, a Cayman Islands company, adds another layer of cover to the 2009 transaction, Parkton Re - a $200 million cat bond program issued by Swiss Re, which marked the first time a U.S. collective insurance pool had accessed the capital markets for hurricane risk.

The NC JUA/IUA is now covered by a combined $505 million in catastrophe bond protection to manage its hurricane risk for the 2010 hurricane season.

Both class notes of the transaction have been rated BB- by rating agency Standard & Poor's (S&), and will use Treasury Money Market Fund Yields. The $200 million Class A notes will receive a 6.25 percent return on its coupon in year one and a 7 percent return in years two and three. The Class B $105 million notes will see a 6.5 percent return. The bond will mature in May 2013.

GC Securities, part of reinsurance broker Guy Carpenter, facilitated the transaction and served as sole bookrunner. The broker was also co-lead manager with Munich Re on the note issuance. The catastrophe bond utilizes an indemnity trigger structure based on the Ultimate Net Loss of the NC JUA/IUA in the event of a hurricane, GC Securities said in a statement.

"Johnston Re includes a feature originally developed in Parkton, in which the release of non-needed capital can occur if the bond is extended beyond the risk period for claims development. Additionally, Johnston Re is the first bond to lower the minimum retained share within the risk layer from 10 percent to 5 percent," GC Securities said.

"This second issuance by the NCJUA/IUA sends a strong signal to the investor community that accessing cat bond capacity is an integral part of a capacity purchase program. The investors rewarded this message with firm support, as evidenced by the strong book and price execution," Chi Hum, global head of distribution at GC Securities said.

"Features of this cat bond that make it appealing include the diversification it brings to the association's overall catastrophe loss financing program, its multi-year coverage, an indemnity trigger and protection through collateralized reinsurance," Dewey Meshaw, general manager at NC JUA/IUA said in a joint statement with GC Securities.

The close of Johnston Re is the fifth cat bond to close in 2010, totaling $1.105 billion in issuance. The Hartford started the year with its $180 million Foundation Re III, followed by Swiss Re's, $120 million Successor X, State Farm's $350 million Merna Re II and first time issuer, $150 million Assurant's Ibis Re II.

Swiss Re told Reuters it expected issuance to exceed $2 billion for the first half of 2010, as the market headed into the U.S. wind season. This is compared to an issuance total of $1.4 billion for the same period last year.

For more information on cat bonds, see the Thomson Re Thomson Reuters Insurance Linked Securities Community - https://inside.thomsonreuters.com/trading/ils.

Currently three cat bonds are being marketed to investors in the run-up to the start of the U.S. hurricane season on June 1. First time issuer Chartis is expected to close its Lodestone Re bond this week, while Nationwide Mutual Insurance Co launched its U.S. hurricane and earthquake, Caelus Re at the beginning of the month with a BB+ rating from S&P.

The presale report for USAA's 14th catastrophe bond Residential Re bond is expected to be published this week.

A complete catalog of Catastrophe bond pre-sales reports and ratings criteria are now available from S&P directly from their website. To access, click http://www.standardandpoors.com/ratings/ils/en/us.