North Carolina Wind Pool Gets Extra Protection with $305M Cat Bond

May 11, 2010

North Carolina’s insurance pool for coastal properties now has an extra financial cushion in case a major hurricane strikes.

Risk specialist Guy Carpenter & Co., LLC, and GC Securities, announced the completion of a $305 million, two-class note issuance from a new 144A catastrophe bond program, Johnston Re Ltd., a Cayman Islands exempted company, to benefit the pool, known as the North Carolina Joint Underwriting Association and the North Carolina Insurance Underwriting Association.

The two associations are now covered by a combined $505 million in catastrophe bond protection for the current hurricane season.

The $305 million Johnston Re transaction adds another layer of cover to the 2009 transaction known as Parkton Re, a $200 million cat bond program issued by Swiss Re. That was the first time a U.S. residual insurance pool had accessed the capital markets for hurricane risk.

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

The Johnston Re note provides $305 million of fully collateralized, per-occurrence protection through May 1, 2013, against the effects of North Carolina hurricane risk.

According to the parties, the bond was tailored to be optimized with the existing Parkton bonds as well as the NC JUA/IUA’s traditional reinsurance program. Specifically, the Class A Notes incorporate an innovative “first of its kind” non-event, time activated dropdown feature and coupon step-up to replace the Parkton bonds when they mature in May 2011.

The catastrophe bond utilizes an indemnity trigger structure based on the Ultimate Net Loss of the JUA/IUA in the event of a hurricane. The flexible structure allows for the bifurcation of capital at different cost implications upon the occurrence of covered events into capital used for loss development for prior covered events, and remaining capital available for future covered events.

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.

“This transaction incorporates the structural advances achieved in Parkton Re, the NC JUA/IUA’s first cat bond, as well as several first-of-their-kind features to optimize the performance of Johnston Re throughout its three-year risk period. The structural design of Johnston Re shows that further benefits can be achieved in the catastrophe bond marketplace, regardless of whether it is a first issuance or subsequent issuance for a sponsor,” said Cory Anger, Global Head of ILS Structuring, GC Securities.

Chi Hum, global head of Distribution, GC Securities, said the 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.”

Dewey Meshaw, general manager, NC JUA/IUA, said the deal has several advantages for the insurer. “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,” Meshaw said.

Topics Catastrophe Hurricane North Carolina

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