U.S. primary insurer The Travelers Companies, Inc. has successfully sponsored its fourth catastrophe bond transaction with the recently completed Long Point Re III Ltd. (Series 2013-1) transaction. The second issuance under its Long Point Re III Cayman Islands domiciled SPV, this deal secures Travelers a $300m three-year source of fully-collateralized reinsurance protection against hurricanes in northeastern U.S. states on an indemnity and per-occurrence basis.
Long Point Re III 2013 continues Travelers focus on northeast and Atlantic state hurricane coverage, effectively providing another layer of capital markets backed reinsurance cover for this peril from Virginia to Maine. This deal is the insurers second indemnity cat bond, with its first two deals having been industry loss triggered.
The 2013 deal is more risky than its transaction from last year, attaching at an indemnity level of $1.25 billion and having an exhaustion point of $1.8 billion, so covering a 54.55% of a layer beneath the Long Point Re III Ltd. (Series 2012-1) which attaches at $2 billion of losses.
The covered book of business which has been ceded in the transaction is a subset, and a majority, of Travelers’ portfolio from its personal and commercial-lines business. According to rating agency Standard & Poor’s the commercial-lines business is a mix of Travelers’ select accounts (small business policies) and commercial accounts (midsize business policies). Certain business units that cover large and unique exposures, complex financial structures, and mobile property have been excluded from the transaction.
Showing the appetite that investors have for catastrophe bond notes, Long Point Re III 2013-1 doubled in size from the initial volume of $150m that it was marketed at to $300m of notes by the time it completed. The pricing also dropped, it had launched with a coupon price range of 4% to 4.75% and eventually priced at the bottom end of that range at 4%.
GC Securities, who acted as joint bookrunner on this transaction, noted that the deal enhanced the protection that Travelers receives from the capital markets through the addition of a number of new features which provide flexibility to the sponsor. This includes an expanded definition of hurricanes, this has been worded to include and storm reported by any agency at any time to be a hurricane and also includes storms which may merge with other systems. This new definition would ensure that the cat bond covered a storm such as hurricane Sandy.
Other enhancements include the ability to adjust the layer of coverage using a variable reset feature which allows the sponsor, Travelers, to adjust the trigger amount as long as the expected loss remains between 1% and 1.5%. The deal also features a call option allowing Travelers to redeem the cat bond, for a small above par penalty. This would allow the insurer to swap the cover back to traditional reinsurance sources if the pricing was attractive enough to offset the penalty.
Cory Anger, Global Head of ILS Structuring at GC Securities, commented; “In addition to the favorable pricing and capacity environment for cat bond sponsors, Long Point Re III demonstrates the continued innovation of the ILS sector to improve and balance structural terms. The Series 2013-1 Notes demonstrate state-of-the-art structural features that allow Travelers to best manage its protection needs with respect to northeast United States hurricanes and available forms of protection.”
The Long Point Re III 2013-1 cat bond issuance allowed Travelers to optimise its capital markets protection, with multi-year coverage and these new features, and acquire protection much further down its reinsurance tower for a much better price. It’s 2012-1 issuance priced at 6% with a much higher attachment point than this deal which has priced at 4%.
This further demonstrates the appetite and willingness of capital markets investors to provide sources of reinsurance cover at very reasonable pricing.
Chi Hum, Global Head of ILS Distribution at GC Securities, said; “High levels of investor cash inflows led to broad investor support for a repeat issuer resulting in strong execution of the Longpoint Re III – Series 2013-1 Notes issued for the benefit of Travelers. With this Series 2013-1 issuance, Travelers continues to refine their cat bond structures to optimize and integrate its impact relative to their entire reinsurance purchase program.”
David Priebe, Vice Chairman of Guy Carpenter and Head of GC Securities, added; “Long Point Re III is the latest example of the accelerated convergence in 2013 between the capital markets and (re)insurance sectors. GC Securities is proud to have assisted Travelers in accessing capital markets capacity through the offering of the Series 2013-1 Notes.”
Swiss Re acted as lead structurer and the other joint bookrunner for the offering. Markus Schmutz, Head of Structuring and Origination at Swiss Re Capital Markets, commented; “We are delighted to continue our support for the Travelers’ Long Point Re III catastrophe bond program. The transaction demonstrates Swiss Re’s strong commitment to serve our clients in transferring natural catastrophe risks to the capital markets and underlines our strong market position in developing innovative and efficient catastrophe bond products.”
Rating agency Standard & Poor’s assigned its ‘BB(sf)’ rating to the Series 2013-1 Class A catastrophe bond notes issued by Long Point Re III Ltd.
The $300m of Series 2013-1 Class A principal-at-risk variable rate notes issued by Long Point Re III Ltd. have been admitted for listing on the Cayman Islands Stock Exchange.
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