Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Chubb’s East Lane Re VI cat bond continues unmodelled risk trend


More information has become available on U.S. primary insurance group Chubb’s sixth catastrophe bond transaction, East Lane Re VI Ltd. (Series 2014-1), which continues a recent trend for inclusion of unmodelled risks cat bond transactions.

Over the last year or two, new catastrophe bond transactions have increasingly included coverage for some of a sponsors unmodelled risks, so risks which sit outside of the world covered by the risk models that have been used to derive the probabilities associated with the cat bond.

Unmodelled risks have been included in many cat bonds, it goes with the territory of an increasing use of indemnity triggers, but it is an ever more common occurrence now. It requires investors to either trust the modelling undertaken by the sponsor, the data the sponsor provides or to invest time and effort in understanding how these unmodelled risks could affect the probability of attachment and expected losses for the deal.

Investors have proved willing to undertake this additional work and ILS funds have been noticeably beefing up their analytical, risk modelling and actuarial capabilities as a result of this, as well as improving their ability to underwrite collateralized reinsurance which requires the same skillsets. The acceptance of unmodelled risks is a further sign of the cat bond investor markets growing maturity.

Chubb’s East Lane VI Re is the latest cat bond to include unmodelled risks, which Standard & Poor’s highlights in the pre-sale report.

With East Lane Re VI Ltd. Chubb is seeking a four-year source of fully-collateralized reinsurance protection for the perils of U.S. named storms, earthquakes (including fire following and sprinkler leakage, both which are included in the modelling), severe thunderstorms and winter storms, on an indemnity and per-occurrence basis. The transaction is being marketed with a preliminary size of $225m.

The East Lane Re VI cat bond covers a selection of Chubb’s personal and commercial property exposures. The protection benefits a variety of Chubb companies, including; Federal Insurance Co., Vigilant Insurance Co., Chubb Insurance Co. of New Jersey, Chubb National Insurance Co., Chubb Indemnity Insurance Co., Great Northern Insurance Co., Pacific Indemnity Co., Executive Risk Indemnity Inc., Executive Risk Specialty Insurance Co., Chubb Custom Insurance Co., Texas Pacific Indemnity Co., and Chubb Lloyd’s Insurance Co. of Texas.

The covered area for the cat bond is the following U.S states; Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont, Virginia, and the District of Columbia.

In terms of the contribution to expected losses, named storm risk makes up the bulk (88.7%) of it given that the covered area is not one which has experienced major insurance industry losses from earthquakes. New York, New Jersey, Connecticut and Massachusetts contribute 88% of the expected losses to the deal, with New York 42.7% of expected losses alone.

Covered losses under the East Lare Re VI cat bond are for personal lines and commercial lines property exposures. S&P notes the following on the mix of business covered; “Chubb primarily markets its personal-lines policies to high-net-worth individuals and is well known for insuring high–value homes, auto, and other properties. The company has also established a presence in the standard commercial market where it writes commercial multiperil, workers’ compensation, umbrella liability, and other casualty, property, and marine policies Its specialty commercial products include directors and officers, errors and ommissions, and surety policies.”

East Lane Re VI contains a balanced mix of personal and commercial risks, with commercial exposures contributing 40.7% of expected losses for the cat bond, according to S&P. A portion of the exposures covered by the cat bond are unmodelled, these are primarily within Chubb’s commercial property book or in package forms that fall under a bundle of additional coverages which are included, said S&P.

The East Lane Re VI cat bond notes cover losses between an initial attachment point of $3.0 billion and an initial exhaustion point of $3.3 billion.

S&P noted that when RMS performed an analysis of historical catastrophe events, the three historical events that generated the highest modelled losses were; the 1938 unnamed hurricane that made landfall in New York ($2.887 billion), the 1954 Hurricane Carol ($1.265 billion), and the 2012 Hurricane Sandy ($1.104 billion).

There are no historical loss events, which were modelled by RMS as part of the issuing this transaction, which would have breached the $3 billion attachment point it appears. Also if you look at Chubb’s largest natural catastrophe insured loss, which was hurricane Katrina, it comes nowhere near to the attachment point.

Standard & Poor’s has given the single Class A tranche of $225m East Lane Re VI Ltd. Series 2014-1 notes a preliminary rating of BB+(sf).

Finally a reminder of the key figures the notes are being marketed with. The attachment probability is 0.87%, the expected loss 0.82% and the exhaustion point 0.77%. The guidance range for the interest spread to be paid to investors is 3% to 3.75%

The East Lane Re VI Ltd. (Series 2014-1) catastrophe bond from Chubb is expected to complete in the first week of March, so we expect to have further updates on pricing as the marketing progresses.

You can read all about this cat bond in the Artemis Deal Directory. You can also read about Chubb’s previous five cat bond deals, East Lane Re Ltd. in April 2007, East Lane Re II Ltd. in March 2008, East Lane Re III Ltd. in February 2009, East Lane Re IV Ltd. in March 2011 and East Lane Re V Ltd. in March 2012.

Artemis Live - ILS and reinsurance video interviews and podcastView all of our Artemis Live video interviews and subscribe to our podcast.

All of our Artemis Live insurance-linked securities (ILS), catastrophe bonds and reinsurance video content and video interviews can be accessed online.

Our Artemis Live podcast can be subscribed to using the typical podcast services providers, including Apple, Google, Spotify and more.

Print Friendly, PDF & Email

Artemis Newsletters and Email Alerts

Receive a regular weekly email newsletter update containing all the top news stories, deals and event information

  • This field is for validation purposes and should be left unchanged.

Receive alert notifications by email for every article from Artemis as it gets published.