U.S. insurer Travelers 2009 catastrophe bond issuance Longpoint Re II Ltd. was one of the transactions which saw changes to its risk profile when it was remodelled using the latest version of the RMS hurricane risk model (V. 11) at its annual reset. At the time Travelers said that it suspected the attachment point may have increase by as much as 70% once reset, clearly a jump of that size would affect the protection that the cat bond afforded Travelers.
In comments made in its recent earnings conference call, Travelers CFO Jay Benet suggested that it may try to fix the issue with another catastrophe bond issuance when Long Point Re II matures.
Back at the middle of 2012, Travelers said “It is estimated that the attachment point for the index-based losses and the maximum limit on the reinsurance agreements in the Longpoint Re II program will increase by as much as 70%, reflecting increases in the third-party model’s industry estimate of covered losses.” That would have meant that its reinsurance protection changed, creating a gap where Travelers may not have been as protected and Travelers may have had to buy additional cover to fill the gap.
Benet noted that when RMS 11 came out it raised the trigger points for Longpoint Re II. He further commented that when the cat bond matures Travelers will probably seek to bring the attachment point down into something that looks more like its most recent cat bond, Long Point Re III Ltd.
That makes a lot of sense. The increased attachment point, or trigger level, reduced the probability of attachment of the cat bond and so moved the protection it provided Travelers with further up its overall reinsurance program. The insurer would benefit more by bringing the attachment point back down for that layer of cover enabling it to restructure that part of its reinsurance. For investors, the reduced risk of attachment would have been a bonus, as the coupon they received would not have changed.
Travelers has also moved some of its reinsurance protection to aggregate covers. The Long Point cat bonds have provided per-occurrence cover, but it has been expanding its aggregate protection at the recent January renewals, so there is a chance that a new cat bond may seek to follow this trend.
Longpoint Re II matures at the end of 2013 so the market should look out for a new cat bond from Travelers around the end of this year.
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