Fitch Expects to Rate Catastrophe Bond Long Point Re III Ltd. Series 2015-1 Class A Notes ‘BB- sf’

The following is from Fitch Ratings on April 27:

Fitch Ratings expects to rate the series 2015-1 principal at- risk variable rate notes issued by Long Point Re III Re Ltd., a Cayman Islands exempted company licensed as a Class C insurer, as follows:

--Class A notes expected to mature May, 2018 'BB- sf'; Rating Outlook Stable.

Neither the principal amount nor the risk interest spread has been determined.

TRANSACTION SUMMARY

The series 2015-1 notes provide three years of indemnity, per occurrence coverage to various insurance subsidiaries or affiliates of the Travelers Companies, Inc. (Travelers) (IDR 'A+'; Stable Outlook by Fitch) for Tropical Cyclone, Earthquake, Severe Thunderstorms and Winter Storm events. The Covered Area is restricted to the northeast U.S. that includes Connecticut, Delaware, District of Columbia, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Virginia and Vermont.

The Total Insured Limit of the Subject Business for Tropical Cyclone is about $1.4 trillion and is split 61 percent personal insurance and 39 percent commercial insurance (based on the Initial Data excluding non-modeled exposures). Within the commercial business, 12.9 percent is classified as First Party - National Property which may pay for business interruption losses. Over 41 percent 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.

The effective Reset dates will occur in May, 2016 and May, 2017 where AIR Worldwide, as the Reset Agent, will rerun the Escrow Model with updated data provided by Travelers. Travelers may elect to lower the Expected Loss to any level but may not increase the Expected Loss above the Maximum Expected Loss of 1.606 percent. The Risk Interest Spread will be adjusted to reflect any changes in the risk profile but subject to a Minimum Risk Interest Spread.

The 2015-1 notes are exposed to principal loss if a Covered Event exceeds $2.0 billion in covered losses. The Loss Amount may be lowered if Travelers Retained Share is less than 10 percent. The notes are totally exhausted if the Loss Amount exceeds $2.5 billion. In the calculation of the Ultimate Net Loss, there is a Growth Limitation Factor which is the lesser of 1.0 and the ratio of the Growth Allowance Factor (1.10) and the Actual Growth Factor. Unlike some other deals that Fitch has rated, loss adjustment expenses are excluded from the Ultimate Net Loss.

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.

The notes may be extended up to 12 additional quarters if certain qualifying events occur; however, they are not exposed to any further catastrophe events during this extension period. The Final Extended Redemption Date will be May 2021. The interest spread may be reduced if a covered event occurs. At any time, the notes may be redeemed due to listed Early Redemption Events such as clean-up events or regulatory and tax law changes and also includes an option for Travelers to call the 2015-1 note (subject to an additional repayment amount). The repayment of the notes to the note holders occurs subsequent to any qualified payments to Travelers for covered events. Note holders have no recourse against Travelers.

KEY RATING DRIVERS

The rating is based on the evaluation of the natural catastrophe risk, the counterparty risk of Travelers, the credit risk of the permitted investments and the structural integrity of the transaction. The natural catastrophe risk represents the lowest rating amongst the three risk segments and currently drives the final rating of the notes.

The rating analysis in support of the evaluation of the natural catastrophe risk is highly model-driven. As with any model of complex physical systems, particularly those with low frequencies of occurrence and potentially high severity outcomes, the actual losses from catastrophic events may differ from the results of simulation analyses. Fitch is neutral to any of the major catastrophe modeling firms chosen by the issuer to provide the model analysis, and thus Fitch did not include any explicit margins or qualitative haircuts to the probability of loss metric provided by the modeling firm.

AIR Worldwide Corp. (AIR) provided the risk analysis using their proprietary software and risk models implemented in Touchstone 2.0.2 and Catrader 16.0 which includes the U.S. versions of its Hurricane Model (version 16.0), Earthquake Model (version 9.1), Severe Thunderstorm Model (version 7.0) and Winter Storm Model (version 1.7). These models will be escrowed and used by AIR in determining any future annual reset. AIR has stated that there will be updates to the Hurricane Model in the summer of 2015 but has not indicated if there would be any favorable (or unfavorable) impact on the risk analysis of the notes.

Based on fifty thousand simulations, the one-year attachment probability for the 2015-1 notes was 1.276 percent. This corresponds to implied ratings of 'BB-' using Fitch's ILS Calibration Matrix with a one year time to risk maturity assumption. A sensitivity test performed by AIR reflecting the impact of elevated sea surface temperatures produced a Modeled Trigger Probability of 1.35 percent which would not change the implied rating. Results from other third- party modeling firms or from Travelers were not provided that could indicate different levels of attachment probability. Note holders are exposed to this basis risk or the difference between actual losses incurred by Travelers and the AIR modeled losses.

Nearly 83 percent of the Modeled Trigger Probability is attributable to Tropical Cyclones. Severe Thunderstorms represent almost 12 percent, while Earthquake and Winter Storms represent 5 percent and 1 percent, 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 percent with Connecticut and New Jersey each representing 14.0 percent. 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.

During the annual reset process, Travelers may lower the Updated Modeled Expected Loss to any level but is limited to raising it to 1.606 percent. Fitch's implied rating calibration matrix is dependent on the Trigger Probability (or first-dollar loss); consequently, we cannot estimate at this time if there would be any rating impact if the expected loss was raised to its maximum.

Long Point III Re is reliant on the counterparty credit risk of Travelers to make periodic payments for the Risk Interest Spread. In the event that any payment is not made, principal will be returned to Note holders. In addition, the notes ultimately 'follow the fortunes' of Travelers over the next three years in regards to underwriting of new business, claim loss management and reserve practices. Ernst & Young Ltd. (Bermuda) has been appointed as the Claims Reviewer, KPMG in the Cayman Islands acts as the independent auditor and Towers Watson (Bermuda) Ltd., acts as the Loss Reserve Specialist for the Issuer.

Proceeds from this issuance will be held in a reinsurance trust account and used to purchase high-credit-quality money market funds meeting defined eligibility criteria, otherwise funds will be held in cash. Investment yields generated from these permitted investments are passed directly to note holders as the other component of the variable rate. A downgrade of a permitted investment will not necessarily lead to a replacement of that investment. Further, note holders are exposed to possible market value risk if the net asset value of a money market fund falls below $1.00 or redeemed in adverse market conditions. Finally, certain actions may be required if the reinsurance trust account is invested in money market funds and it is determined that gross proceeds from the disposition or redemption of the money market funds will become subject to withholding tax.

RATING SENSITIVITIES

This rating is sensitive to the occurrence of a qualifying natural catastrophe event(s), Travelers' election to reset the note's expected loss, changes in the data quality, the counterparty rating of Travelers and the rating or performance on the assets held in the collateral account.

If a qualifying covered event occurs that results in a loss of principal, Fitch will downgrade the note to reflect an effective default and issue a Recovery Rating.

The implied rating of the natural catastrophe risk profile may change if Travelers elects to significantly reduce (or increase) the Modeled Expected Loss at the Reset Dates which may impact the rating of the series 2015-1 Class A notes.

The escrow model may not reflect future methodology enhancements by AIR which may have an adverse or beneficial effect on the implied rating of the notes were such future methodology considered.

To a lesser extent, the notes may be downgraded if the credit ratings of Travelers or the reinsurance trust account assets were significantly downgraded to a level commensurate to the implied rating of the natural catastrophe risk. Likewise, it is unlikely that the 2015-1 notes would be rated above the credit ratings of Travelers if the implied rating of the natural catastrophe risk was significantly reduced to those ratings.

Fitch's expected rating is based on a review of a Preliminary Offering Circular Supplement and the Offering Circular, the AIR Expert Risk Analysis and AIR Expert Risk Analysis Results and a Rating Agency Presentation (all supplied between April 17 and 20,). The final rating is contingent upon receipt of signed legal documents pertinent to this transaction that do not materially change what has currently been reviewed. Any changes could lead Fitch to an alternative rating or inability to rate the notes.

Additional information is available at fitchratings.com.

Applicable Criteria and Related Research:

--'Insurance-Linked Securities Methodology' (Aug. 8 2014);

--'Insurance Rating Methodology' (Sept. 4, 2014);

--'Global Structured Finance Rating Criteria' (Aug. 4 2014);

--'Counterparty Criteria for Structured Finance Transactions and Covered Bonds' (May 14, 2014).

Applicable Criteria and Related Research:

Insurance-Linked Securities Methodology

http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=752532

Insurance Rating Methodology

http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=756650

Global Structured Finance Rating Criteria - Effective from 4 August 2014 to 31 March 2015

http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=754389

Additional Disclosure

Solicitation Status

http://fitchratings.com/gws/en/disclosure/ solicitation?pr_id=983695

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