Chubb’s latest foray into the catastrophe bond market, East Lane Re V Ltd. which we uncovered initial information about on Tuesday, received its preliminary rating from Standard & Poor’s yesterday. As such we have more detail on the transaction to share with you. The deal is targeting $125m of indemnity based, fully collateralized risk transfer via a reinsurance agreement on a per-occurrence basis over a four-year risk period to protect Chubb subsidiaries against certain U.S. hurricanes and severe thunderstorms.
East Lane Re V Ltd., who will be issuing the notes, is a newly established Cayman Islands domiciled SPV and has been set up as a shelf program which would allow Chubb to issue future series of notes through the entity. The issuer is seeking to raise $125m in two tranches from this Series 2012-1 deal. A $75m Class A tranche of notes and a $50m Class B tranche are currently being marketed, there’s a good chance that those tranches could upsize if the market appetite is strong enough. Through this deal the issuer will be providing certain member companies of Chubb Group with a source of collateralized, excess of loss reinsurance protection.
Chubb’s 2009 cat bond East Lane Re III Ltd. matures in March this year and provided them with $150m of U.S. (mostly Florida) hurricane coverage. East Lane Re V will go some way to replacing this cover in time for the start of hurricane season. Chubb also currently benefit from cover for U.S. hurricanes, earthquakes, thunderstorms, and winter storms from their 2010 East Lane Re IV Ltd. deal.
East Lane Re V is designed to cover U.S. hurricanes and severe thunderstorms on a per-occurrence basis in these specific U.S. states; Alabama, Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, and Texas. Covered losses are for personal lines property exposures within Chubb’s subsidiaries books of business only and are based on Chubb’s ultimate net losses. The duration of East Lane Re V is four years and so will provide protection until March 2016.
The Class A notes will provide cover for a percentage of losses above an attachment point of $1 billion up to an exhaustion point of $1.15 billion. The Class B notes attach at $850m up to $950m. While those attachment points seem quite low for an insurer of Chubb’s size it must be remembered that these are for personal lines property losses only, so likely no more risky than other cat bonds with similar exposure. The Class A notes have a probability of attachment of 1.59%, annual expected loss of 1.4% and a probability of exhaustion of 1.23%. Class B has a probability of attachment of 2.11%, annual expected loss of 1.91% and a probability of exhaustion of 1.76%. There will be three annual resets during the four-year deal term.
Risk modelling for the transaction is provided by AIR Worldwide, continuing the trend in recent months where they have been prevalent in many catastrophe bond transactions. Deutsche Bank Securities and Goldman Sachs are acting as joint structuring agents and book runners, Citigroup are also a joint book runner while GC Securities and Willis Capital Markets & Advisory are co-managing the transaction. That is a lot of supporting services which should ensure Chubb get very good marketing to investor circles and could assist them upsize this deal significantly if they chose and appetite was strong.
Based on AIR’s analysis only one historical event would have triggered this cat bond, an unnamed 1928 hurricane would have caused a 100% loss to the Class B notes and a 68% loss to the Class A. Interestingly, and perhaps surprisingly, there is no mention of tornado losses or potential impact in S&P’s preliminary rating report. We would have thought that this may have been a concern, given the extent of tornado losses last year and the default of the Mariah Re bonds, however perhaps Chubb’s exposure is not so great to severe thunderstorms. S&P do note that the contribution to expected losses by peril is split as hurricane 88%/87% and severe thunderstorm just 12%/13% for each Class of notes. Also of interest is the fact that Florida will contribute almost 70% of the expected loss by state.
The collateral proceeds from the sale of the notes will be deposited into separate reinsurance trust accounts for each class of notes and will be invested in highly rated Treasury money market funds.
The Class A notes are expected to price somewhere in the range of 8%-9% above Treasury money market funds. The Class B notes are expect to price between 10%-11% above TMMF.
Standard & Poor’s gave the East Lane Re V deals notes preliminary ratings of ‘BB’ for the Class A notes and ‘BB-‘ for the Class B notes.
We’ll update you further as the transaction comes to market.