One of the outstanding catastrophe bonds which has been considered most at risk of losses from hurricane, or superstorm, Sandy is U.S. insurer Chubb’s East Lane Re IV Ltd., particularly the Class B tranche of notes which have the lower trigger attachment point.East Lane Re IV has seen one of the largest mark-to-market price impacts of any exposed cat bond, suggesting that investors felt it was likely more exposed to the impact of hurricane Sandy.
East Lane Re IV provides Chubb with a source of multi-peril, including U.S. hurricanes in the northeast region, reinsurance cover on a per occurrence basis. The transaction uses an indemnity trigger based on the losses of a number of Chubb group subsidiaries including Federal Insurance Company.
The Class B tranche of notes has an indemnity attachment point of $2.15 billion of paid losses incurred by Chubb and its subsidiaries. Chubb recently announced that its losses from Sandy would be approximately $880 million before tax, or $570 million after tax, net of reinsurance recoverable and including an estimated reinsurance reinstatement premium. Chubb has a $500m retention on their reinsurance programme this year so we presume that the post-tax number is made up of $500m of retained losses and another $70m for estimated reinsurance reinstatement premiums.
So that means that Chub’s loss has eaten into their reinsurance cover, but at this time we don’t know how much exactly. With the cat bond attaching at $2.15 billion, there is over $1.5 billion worth of reinsurance protection to eat into first.
The East Lane Re IV Class B notes have been one of the most affected by mark-to-market losses from hurricane Sandy. Around the 7th of December the notes were priced at an average bid in the region of 86. They had been even lower than that, with bids for the East Lane Re IV notes coming in around the mid to high 70’s in the second week of November, so some recovery had begun already.
Now, having seen some of the latest pricing for these notes, they have climbed further to an average bid in the region of 97 at the end of last week. On one brokers pricing sheet that is an improvement of over 8 points in one week. This suggests that investors confidence in the Class B notes ability to avoid losses has increased and given where they are currently priced we suspect that Chubb’s loss has not been sufficient to trigger these notes.
There are still a number of industry loss and indemnity based cat bonds which are priced a little below par but none are pricing anywhere near the levels that East Lane Re IV dropped to. The only cat bond tranche which continues to look distressed is Swiss Re’s Successor Class V – F4 cat bond notes which are still priced down about 25% at bids of around 75. They now hold the dubious honour of being the tranche of cat bond notes thought to be most at risk of a loss due to Sandy by investors.
The bids and offers that are made for outstanding cat bond notes are a good measure of the investor markets sentiment for them. After a catastrophe event which causes mark-to-market losses sentiment of investors is a great way to establish whether a loss is likely or not. Given that investor sentiment for the East Lane Re VI Class B notes has been improving and has improved measurably since Chubb announced their loss estimate, we suspect this deal will escape Sandy unscathed.