Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Long Point Re III Ltd. (Series 2015-1)

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Long Point Re III Ltd. (Series 2015-1) – At a glance:

  • Issuer: Long Point Re III Ltd. (Series 2015-1)
  • Cedent / sponsor: Travelers
  • Placement / structuring agent/s: Swiss Re Capital Markets is sole structuring agent and with Deutsche Bank Securities joint bookrunners. Aon Benfield Securities is co-manager.
  • Risk modelling / calculation agents etc: AIR Worldwide
  • Risks / perils covered: U.S. tropical cyclone, earthquake, severe thunderstorm, winter storm (Northeastern U.S. states only)
  • Size: $300m
  • Trigger type: Indemnity
  • Ratings: Fitch: Class A - 'BB- sf'
  • Date of issue: May 2015

Long Point Re III Ltd. (Series 2015-1) – Full details:

This new 2015 Long Point Re III deal will be the fifth cat bond issuance by Travelers and in the details retrieved from sources it transpires that this is Travelers first multi-peril deal, as the previous four were all U.S. hurricane bonds.

In this issuance Long Point Re III will issue a single tranche of Series 2015-1 Class A notes, preliminary given a size of $200m, which will be sold to investors to collateralize reinsurance agreements covering the insurer from multiple perils over a three-year term.

The covered perils are tropical cyclones, earthquakes, severe thunderstorms and winter storms. Coverage for these perils is across northeast U.S. states, on a per-occurrence basis and the cat bond features an indemnity trigger.

The covered U.S. states include Connecticut, Delaware, District of Columbia, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Virginia and Vermont.

The Long Point Re III 2015-1 cat bond covers a number of Travelers insurance companies, Travelers Indemnity, Travelers Casualty & Surety, St. Paul Fire and Marine and The Standard Fire Insurance Company, as well as any associated subsidiaries of each.

The notes will attach at $2 billion of losses and cover losses up to an exhaustion point of $2.5 billion, however we’re told this is after a retention of at least 10% of event losses and a maximum per covered insurer of $20m per risk.

Fitch Ratings explained the subject business:

The Total Insured Limit of the Subject Business for Tropical Cyclone is about $1.4 trillion and is split 61% personal insurance and 39% commercial insurance (based on the Initial Data excluding non-modeled exposures). Within the commercial business, 12.9% is classified as First Party – National Property which may pay for business interruption losses. Over 41% of the commercial business has a Total Replacement Cost in excess of $20 million. However, with respect to each insured, the maximum amount of losses to be included in ‘Losses’, whether paid or as loss reserves, is initially limited to $20 million (Initial Single Risk Cap). This limit may be increased to no more than $40 million upon any Reset.

That results in an initial attachment probability of 1.276%, an initial exhaustion probability of 0.946% and an expected loss of 1.106% base case, or 1.176% on a sensitivity case basis.

Price guidance for the Long Point Re III 2015-1 Class A notes is set at 3.5% to 4%, which suggests a multiple of around 3x the sensitivity case expected loss at the lower end of pricing.

We understand that this catastrophe bond features a variable reset feature, now typical in cat bonds, and also a call option, which is becoming typical for large primary insurers allowing them an early redemption opportunity.

Fitch Ratings on historical events that could affect the cat bond:

On a historical basis, Travelers have not experienced any actual natural catastrophe losses that would have triggered a loss event on this class of notes. Only as a point of reference, Travelers reported total case incurred losses of $1.6 billion for Hurricane Katrina (which included areas outside the Covered Area of this note) and $0.8 billion for Superstorm Sandy. Likewise, the largest winter storm event in 2014 was less than $150 million. These reported losses were not limited by the Single Risk Cap mentioned above.

And on the risk modelling, Fitch explained:

Nearly 83% of the Modeled Trigger Probability is attributable to Tropical Cyclones. Severe Thunderstorms represent almost 12%, while Earthquake and Winter Storms represent 5% and 1%, respectively. This reflects the ‘per occurrence’ trigger feature of the 2015-1 notes where a significant event needs to occur versus multiple aggregate events. In addition, historical data surrounding northeast U.S. earthquake is limited. As can be expected, the State of New York accounts for the largest modeled expected loss at 36% with Connecticut and New Jersey each representing 14.0%. The AIR Risk Analysis did not include the potential 1.10 Growth Limitation Factor. It included both economic demand surge and storm water surge. Secondary perils of fire following earthquakes and sprinkler leakage were included. The data quality and detail provided to AIR appears robust.

Update 1:

The Long Point Re III 2015-1 cat bond looks set to upsize to as much as $300m, after the marketing guidance saw the size target changed.

At the same time the price guidance range was narrowed and moved towards the upper end of initial guidance, at 3.75% to 4%.

Update 2:

The cat bond upsized by 50% to reach the $300m in size offered before close.

At the same time the pricing eventually settled at the mid-point of initial guidance, at 3.75%.

The multiple, of expected loss to coupon, comes out at roughly 3.4x’s the expected loss base case and 3.2x at the sensitivity case.

The cat bond has a variable reset, at which the risk interest spread can be reduced to a minimum of 3.5% and an upper bound of 4.38%, when the attachment is adjusted accordingly.

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