U.S. primary insurer Chubb has returned to the catastrophe bond market to sponsor a $225m East Lane Re VI Ltd. (Series 2015-1) multi-peril transaction. For the 2015 deal the insurer has taken a leaf form USAA’s book, including volcanic eruption and meteorite impact risks in the deal.
With this East Lane Re VI 2015-1 cat bond Chubb is seeking a new multi-year source of fully-collateralized reinsurance protection against multiple U.S. perils. The transaction will see a single Class A tranche of notes issued with a preliminary size of $225m, according to market sources.
As with all Chubb East Lane catastrophe bonds the ultimate beneficiaries of the protection provided will be a range of Chubb insurer subsidiaries. The cover from this East Lane Re VI 2015-1 cat bond will be on an indemnity and per-occurrence basis, we’re told.
The protection provided by the 2015-1 Chubb cat bond will be for the typical cat bond perils of U.S. named storms, earthquakes, severe thunderstorms, winter storms and wildfires as well as the now included meteorite impact and volcanic eruption risks.
USAA was the first to add these two perils to its regular multi-peril catastrophe bond issues in 2014 and it seems Chubb is now following suit, taking the opportunity to add these very remote, but very high severity, risks into its latest cat bond deal.
As you’d expect, the contribution to the deal’s expected loss from meteorites and volcanic risks is minimal, but they are there which will increase the cat bond market’s exposure to them. No doubt we’ll see other insurers follow suit in future as the investor community becomes increasingly used to seeing these perils in transactions.
The other interesting factor about this deal is the term. The risk period for the transaction will be five years, to March 2020, showing that Chubb is seeking to take advantage of broader coverage now available from cat bonds, and investors willingness to allow insurers to lock in longer-term reinsurance coverage.
The covered area for the deal is Chubb’s insurance heartland states of Connecticut, Delaware, the District of Columbia, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont and Virginia.
We understand that the initial attachment probability for the notes is set at 1.35%, with exhaustion at 1.14% and the expected loss at 1.24%. We’re told that this equates to a $2.1 billion indemnity trigger attachment point and a $2.45 billion exhaustion. That $350m gap between attachment and exhaustion points could hint at the ultimate size of the transaction, should Chubb elect to upsize it.
Property Claim Services (PCS) is being used for catastrophe designation on a number of the covered perils we understand, thus ensuring that only events of a certain magnitude and with a third-party agent designating them as catastrophes would qualify.
Pricing wise, the notes are being offered with coupon guidance of 3.5% to 4%, we understand, which with an expected loss of 1.24% should see a multiple well above 2.
Given where this East Lane Re VI 2015-1 catastrophe bond is set to attach, it is more risky than last years East Lane Re VI Ltd. (Series 2014-1) which attaches at $3 billion of losses to Chubb and has an expected loss of 0.82%. That deal priced at 2.75%, so the multiple looks almost aligned.
Chubb’s latest cat bond is being brought to market by Goldman Sachs and GC Securities, acting as joint structuring agents and bookrunners, along with Citigroup and Deutsche Bank as joint bookrunners and Willis Capital Markets & Advisory as a co-manager. RMS is providing risk modelling services for the transaction.
It’s encouraging to see Chubb back in the capital markets, as it continues to diversify its reinsurance program. The addition of the new perils makes sense for the insurer, providing the kind of contingent, peak peril protection that cat bonds are ideal for.
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