East Lane Re IV Ltd. catastrophe bond being marketed for Chubb

by Artemis on February 19, 2011

Chubb are returning to the catastrophe bond market for their fourth transaction in the East Lane Re series of deals. They last issued a cat bond in February 2009 under East Lane Re III to protect their subsidiary Federal Insurance against Florida hurricane risks. This latest deal is a multi-peril transaction which should be attractive to investors.

East Lane Re IV Ltd. is a Class B special purpose insurer established in the Cayman Islands to issue catastrophe bond notes for Federal Insurance Co. and other Chubb subsidiaries. The deal, split into two tranches with a preliminary size of $100m each, is designed to provide Chubb with collateralized reinsurance cover against losses from hurricanes, earthquakes, severe thunderstorms, and winter storms in certain covered areas on an indemnified, per-occurrence basis.

This deal is replacing some of the hurricane cover afforded to Chubb from previous East Lane Re cat bond transactions, much of which matures this year just before the Atlantic hurricane season begins. The Series A and B notes of East Lane Re Ltd., which cover losses from hurricanes in the northeast U.S.; East Lane Re II Ltd.’s Class A and Class B notes covering losses in the northeast from the same four perils as the notes to be issued by East Lane IV in this transaction; and East Lane Re II Ltd.’s Class C notes covering hurricane losses in the U.S. and Canada. As there is so much cover maturing it is likely Chubb will seek to upsize this deal significantly if investor appetite allows.

East Lane Re IV provides Chubb with cover in the following U.S. states; Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont, Virginia, and the District of Columbia.

The notes will be subject to an annual reset. Prior to the first reset the cat bond notes can be triggered by any of the perils covered which generates paid losses of over $3 billion for the Class A tranche and $2.45 billion for the Class B tranche. Chubb have to retain at least 10% of the exposure for each layer of cover. The Class A notes will provide cover for 3 years and the Class B for four years.

As far as collateral goes for this cat bond deal, the trend for highly rated assets continues as proceeds from the sale of the notes will be invested in U.S. Treasury money market funds.

This deal is being brought to market by Deutsche Bank Securities Inc. and Goldman, Sachs & Co. (joint structuring agents and bookrunners) and Citigroup Global Markets Inc. (joint bookrunner only). Co-managers in this deal are GC Securities and Willis Capital Markets & Advisory. AIR Worldwide provide risk modelling and analysis.

Standard & Poor’s have given the Class A and Class B tranches of East Lane Re IV preliminary ratings of ‘BB+’ and ‘BB’ respectively. This catastrophe bond deal is expected to close in early March.

This deal should be well received by the capital markets due to the diversity of perils and geographic locations involved in the risks. Details have been added to our catastrophe bond Deal Directory and we’ll keep you updated as it comes to market.

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