North Carolina Residual Market Issues $500 Million in Cat Bonds
North Carolina’s two residual homeowners insurance markets have jointly issued $500 million in pre-event catastrophe bonds to ensure they have enough money on hand to quickly pay claims following hurricanes and other named storms.
The North Carolina Joint Underwriting Association and North Carolina Insurance Underwriting Association issued the $500 million in catastrophe bonds through their newly formed entity Tar Heel Re Ltd.
The NCIUA operates the Beach Plan, which provides homeowners coverage for 18 coastal counties and the barrier islands. The NCJUA, also known as the windpool, oversees the state’s FAIR plan, which offers similar coverage in the rest of the state. The two share the same computer systems, management and other resources.
As of January 1, the windpool had a total of 312,187 policyholders and in 2012 had an annual premium of $385 million with an exposure of roughly $90 billion.
NCJUA/NCIUA General Manager Gina Schwitzgebel said the $500 million bond deal is the fourth time the windpool has accessed the capital markets. Most recently, the windpool in 2011 secured $201 million in funding. However, those funds can only be accessed after the windpool has losses in excess of $3.4 billion per event.
That left a lot of small events like tropical cyclones and smaller hurricanes out of reach of the bond proceeds and forced the windpool to rely on more expensive reinsurance.
Under the Tar Heel bond, the funds can be accessed when the windpool incurs $2 billion in losses whether they come from one major hurricane or several smaller named hurricanes or tropical storms.
Having that flexibility was a major reason for the Tar Heel Re deal. “This transaction, which employs an annual aggregate structure with an expanded definition of a name storm, provides our associations with an improved post-event cash flow at a competitive price,” said NCJUA/NCIUA Chairman Glen Hahn.
Even with this year’s $500 million bond deal, the associations will soon have to contemplate further action regarding next year’s hurricane season. In 2014, $201 million in bonds will expire. Schwitzgebel said anotherTar Heel Re-like deal that provides aggregate coverage would be high on the associations’ to-do list.