East Lane Re VI Ltd. (Series 2014-1)

With East Lane Re VI Ltd. Chubb is seeking a four-year source of fully-collateralized reinsurance protection for the perils of U.S. named storms, earthquakes (including fire following and sprinkler leakage, both which are included in the modelling), severe thunderstorms and winter storms.

The transaction is being marketed with a preliminary size of $225m, but that could grow if investor demand is high and pricing deemed attractive.

A single Series 2014-1 Class A tranche of notes is proposed, with the $225m of notes being sold to collateralize a reinsurance contract protecting Chubb from these U.S. perils on a per-occurrence basis.

The cat bond will utilise an indemnity trigger with the protection being for a selection of Chubb’s personal and commercial property exposures.

The actual cedent for the East Lane Re VI cat bond is a range of Chubb group companies, while Chubb & Son is described as the sponsor of the transaction.

The protection benefits a variety of Chubb companies, including; Federal Insurance Co., Vigilant Insurance Co., Chubb Insurance Co. of New Jersey, Chubb National Insurance Co., Chubb Indemnity Insurance Co., Great Northern Insurance Co., Pacific Indemnity Co., Executive Risk Indemnity Inc., Executive Risk Specialty Insurance Co., Chubb Custom Insurance Co., Texas Pacific Indemnity Co., and Chubb Lloyd’s Insurance Co. of Texas.

The covered area for the cat bond is 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.

In terms of the contribution to expected losses, named storm risk makes up the bulk (88.7%) of it given that the covered area is not one which has experienced major insurance industry losses from earthquakes. New York, New Jersey, Connecticut and Massachusetts contribute 88% of the expected losses to the deal, with New York 42.7% of expected losses alone.

Covered losses under the East Lare Re VI cat bond are for personal lines and commercial lines property exposures. S&P notes the following on the mix of business covered; “Chubb primarily markets its personal-lines policies to high-net-worth individuals and is well known for insuring high–value homes, auto, and other properties. The company has also established a presence in the standard commercial market where it writes commercial multiperil, workers’ compensation, umbrella liability, and other casualty, property, and marine policies Its specialty commercial products include directors and officers, errors and ommissions, and surety policies.”

East Lane Re VI contains a balanced mix of personal and commercial risks, with commercial exposures contributing 40.7% of expected losses for the cat bond, according to S&P. A portion of the exposures covered by the cat bond are unmodelled, these are primarily within Chubb’s commercial property book or in package forms that fall under a bundle of additional coverages which are included, said S&P.

The East Lane Re VI Series 2014-1 catastrophe bond notes have an attachment point of $3 billion of losses to Chubb companies and an exhaustion point at $3.3 billion.

S&P noted that when RMS performed an analysis of historical catastrophe events, the three historical events that generated the highest modelled losses were; the 1938 unnamed hurricane that made landfall in New York ($2.887 billion), the 1954 Hurricane Carol ($1.265 billion), and the 2012 Hurricane Sandy ($1.104 billion).

There are no historical loss events, which were modelled by RMS as part of the issuing this transaction, which would have breached the $3 billion attachment point it appears. Also if you look at Chubb’s largest natural catastrophe insured loss, which was hurricane Katrina, it comes nowhere near to the attachment point.

The attachment probability is 0.87%, the expected loss 0.82% and the exhaustion point 0.77%.

The transaction will feature a variable reset feature, allowing it to be reset with different attachment and exhaustion, as long as the expected loss remains within a range of 0.75% to 1%. The coupon paid to investors would be adjusted accordingly, commensurate with any change in risk.

The transaction is being marketed with a proposed coupon guidance range of 3% to 3.75%.

Update 1:

The size of the East Lane Re VI cat bond is likely to increase with the cat bond now being offered with a range suggested, of $225m to $270m as investor demand looks set to help Chubb grow its sixth cat bond. Given the attractive issuance conditions in the cat bond market it wouldn’t be surprising to see Chubb go even bigger with this deal if investor oversubscription helps them secure a larger amount of cover.

The pricing has now been lowered and narrowed to 2.75% to 3%, enabling Chubb to secure this cat bond protection at a significantly lower coupon than initial expectations. If it prices at the low end of this reduced range it would represent a saving of nearly 19% from the mid-point of the initial range.

Update 2:

Chubb successfully secured the maximum size of $270m for East Lane Re VI, while at the same time securing the largest saving in terms of the coupon it will pay to investors as the cat bond notes priced at the lowest end of the reduced range at 2.75%.

That means that the East Lane Re VI catastrophe bond has increased in size by 20% while marketing and the pricing has dropped by nearly 19%, if calculated from the mid-point of the initial coupon guidance range.

The East Lane Re VI Ltd. principal at-risk variable rate note program and the $270m Series 2014-1 tranche of variable rate cat bond notes have been admitted for listing on the Cayman Islands Stock Exchange.