U.S. insurance company Travelers is bringing its fourth catastrophe bond to market and the second under its Long Point Re III Cayman Islands domiciled cat bond note issuing entity. Previously Travelers has tapped the cat bond market for reinsurance protection against U.S. hurricane risks in 2007 with Longpoint Re Ltd., 2009 with Longpoint Re II Ltd. and in 2012 with Long Point Re III Ltd. (Series 2012-1). Now they are bringing Long Point Re III Ltd. (Series 2013-1) deal to market.
This latest cat bond from Travelers is similar to its 2012 transaction. This deal will see Long Point Re III Ltd. issue a single tranche of cat bond notes, which has a preliminary size of $150m, designed to protect it against hurricanes in northeastern U.S. states on an indemnity and per-occurrence basis.
The protection, we understand, is for the same group of Travelers subsidiaries as the 2012 deal, so the actual beneficiaries of the cat bond protection are the Travelers Indemnity Co., Travelers Casualty and Surety Co., St. Paul Fire and Marine Insurance Co., and The Standard Fire Insurance Co., together with direct and indirect insurance subsidiaries.
As we understand it at this stage, the 2013-1 tranche of cat bond notes are riskier than last years 2012-1 issuance. The 2012 deal had an Ultimate Net Loss (UNL) attachment point of $2 billion, while this 2013 cat bond is we’re told going to have an attachment point of $1.25 billion and an exhaustion point of $1.8 billion. It’s interesting here to note that Travelers estimated its losses from last years superstorm Sandy at $1 billion, so this cat bond would have been safe from that storm.
We’re told that the attachment probability for the notes will be 1.416% in the first year, while the exhaustion probability will be 0.952% and the expected loss 1.159%. The 2012 deal had an attachment probability of 0.89%, a probability of exhaustion of 0.71% and an expected loss of 0.81%. So the 2013 deal is clearly a riskier layer of Travelers reinsurance tower and the fact that the insurer is bringing a deal to market the year after it last issued, rather than waiting as it has done in the past, is likely to do with the appetite of cat bond investors and the attractive pricing in the market.
The transaction will have a term of three years, with maturity expected in May 2016. We understand that the reinsurance transaction that underlies this cat bond also includes a clause that will see Travelers retain 10% of any qualifying losses. We also understand from sources that this Long Point Re III cat bond has provisions for a variable reset which allows the sponsor, Travelers, to adjust the trigger amount as long as the expected loss remains between 1% and 1.5%. If Travelers chose to do that we assume that the coupon that investors will be paid would be adjusted to reflect the increased risk as well.
We understand that the deal is being marketed with a coupon pricing range of 4% to 4.75% above the return of collateral investments. The deal is being brought to market by Swiss Re Capital Markets and GC Securities and AIR Worldwide are providing risk modelling services.
This transaction offers investors a degree of diversity being for U.S. hurricane risks in the northeastern states only. It will be interesting to see how the transaction fares in terms of size and pricing based on investor appetite with Sandy still firmly in people’s minds. It’s also worth noting that last years Long Point Re III 2012-1 deal priced at 6%, but this 2013-1 deal is riskier and marketed with a lower price. Again this is testament to the price competitive nature of the cat bond market right now and it seems Travelers is keen to take advantage of that.