Travelers loss estimate from Sandy suggests Longpoint cat bonds are safe

U.S. primary insurer Travelers has become the second of the majors to release an estimate of their losses suffered from hurricane Sandy damage. Their estimate of $1.135 billion of gross losses before tax and reinsurance recoveries suggests that their two catastrophe bonds which had exposure to Sandy, Longpoint Re II Ltd. and Long Point Re III Ltd., are both safe. After tax and estimated reinsurance recoveries Travelers estimates their losses as $650m.

Travelers base their estimates on claims reported and projected to be reported, estimated values of properties in the affected areas, estimates of damage from wind and other perils including some flooding under applicable policies and other factors which they say require considerable judgement. They note that due to Sandy’s complexity and size that their actual ultimate losses may be materially different to these estimates, so there is room for the loss estimate to creep upwards.

When we looked at the cat bonds which were considered at risk from hurricane Sandy we discussed the two Travelers deals. Travelers have just under 9% market share in the region affected by Sandy. If we assume their loss estimate won’t creep, and if losses were evenly spread according to market share, then Travelers $1.135 billion would equate to an industry loss of only around $13 billion. It’s widely expected that the industry loss from Sandy will be closer to $20 billion (or even above) which would mean that if losses were evenly spread Travelers gross losses could rise to nearer $2 billion.

However, it’s hard to believe that Travelers loss estimate would rise by quite that much. For their loss estimate to reach $2 billion would be a 76% increase and given that Travelers are including any claims already filed and assessed it’s highly unlikely it will creep upwards that much.

If that is the case then it is safe to consider the two exposed Longpoint cat bonds out of harms way as far as Sandy goes. Long Point Re III Ltd. is an indemnity cat bond with a $2 billion trigger, so unless a 76% loss creep happened then investors in that cat bond are surely safe. Longpoint Re II Ltd. uses an industry loss index and state based payout factors so is much harder to assess, however we find it extremely hard to believe that this would be triggered by anything less than a $25 billion to $30 billion industry loss. While that deal is not completely out of harms way until the final PCS industry loss estimate is announced, risk modeller RMS did not highlight it in their presentation yesterday and as they modelled the deal we think it’s safe to assume it will survive. RMS did highlight one tranche of Long Point Re III but said it was not at risk unless the industry loss estimate was considerably increased.

It is interesting to note that Travelers loss estimate is lower than Allstate’s, and yet Travelers have a larger market share in the affected region by approximately 1.5%. That could be due to Allstate’s considerable auto exposure, however Travelers has some flood losses to contend with, presumably from commercial policies. It’s likely that we will see loss creep in these estimates however it is highly unlikely it would be enough to trouble these cat bonds.