Swiss Re Insurance-Linked Fund Management

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More details on Travelers Long Point Re III catastrophe bond


The latest catastrophe bond of 2012 was launched last week when we revealed that U.S. insurance group Travelers would be returning to the cat bond market with their third transaction, Long Point Re III Ltd. This deal see’s Travelers re-use the naming convention (with the addition of a space) of their two previous cat bonds, Longpoint Re Ltd. and Longpoint Re II Ltd. Now further details on the structure of this transaction and who’s involved in it have emerged thanks to rating documentation from S&P.

Long Point Re III Ltd. is a Cayman Islands domiciled SPV and shelf program which has been created to allow Travelers to sponsor a number of series of catastrophe bond notes should they choose. This first issuance under Long Point Re III Ltd. will see Travelers seek to issue a single Series 2012-1 Class A tranche of notes to provide some of their subsidiaries with cover for certain U.S. hurricane risks over a three-year period. We’re told that the deal is likely to be for a minimum of $150m although it is as yet not officially sized.

The transaction will provide cover to certain operating subsidiaries of the Travelers group of companies and these include the Travelers Indemnity Co., Travelers Casualty and Surety Co., St. Paul Fire and Marine Insurance Co., and The Standard Fire Insurance Co., together with their direct and indirect insurance subsidiaries.

Cover from Long Point Re III will be afforded to the sponsors through risk transfer via a reinsurance agreement on a per-occurrence basis over the three-year period and the transaction will use an indemnity trigger. The Class A notes will cover a percentage of losses between an attachment point of $2 billion and an exhaustion point of $2.5 billion of the ultimate net losses of Travelers in the covered region on a per-occurrence basis. Interestingly, there is a limit set for the maximum loss per risk, or building covered under the transaction, of $20m. By limiting the maximum single loss the probability of attachment will be reduced somewhat (and risks reduced for investors), particularly for hurricane strikes on major cities where building values may be high.

Long Point Re III covers a majority subset of Travelers overall personal and commercial lines portfolio of business. The commercial lines business is a mix of Travelers’s select accounts (small business policies) and commercial accounts according to S&P. Certain business units that cover large and unique exposures, complex financial structures, and mobile property have been excluded from the subject business.

The covered area for Long Point Re III is the northeastern U.S. coastal states of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont, Virginia, and the District of Columbia. These are all hurricane exposed but as this deal is restricted to this area it will still offer investors some level of diversification from Florida and Gulf Coast hurricane risk cat bonds.

AIR Worldwide are providing risk modelling services for the deal. In their historical modelling work they identified one historical event, the 1938 Northeast Clipper hurricane which impacted New York, which would have caused a total loss to the notes with losses of $2.711 billion. No other historical events would even have hit the attachment point. This cat bond is really providing targeted cover for the worst case scenario east coast hurricane impacts, particularly New York state where much of the exposure lies.

The probability of attachment for the notes is 0.89% with an expected loss of 0.81%, while the probability of exhaustion is 0.71%. Those are pretty low figures in the world of cat bonds so it’s expected that this deal will pay a relatively low coupon compared to other U.S. hurricane cat bonds, however the diversification it offers should still make it very attractive to investors looking for safer returns.

Proceeds from the sale of the Long Point Re III notes will be deposited in a reinsurance trust account and invested into U.S. Treasury money market funds. The notes will pay a coupon somewhere in the range of 6.25% to 7% we are told.

Assisting with this transaction are GC Securities who act as lead structurer and also as joint bookrunner alongside Swiss Re Capital Markets. BNP Paribas and Aon Benfield Securities are co-managers on the transaction.

Standard & Poor’s gave the single tranche of Class A notes that Long Point Re III Ltd. is issuing a preliminary rating of ‘BB+’.

We’ll update you further on this cat bond as it comes to market.

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