How Chubb uses catastrophe bonds as part of its reinsurance mix

by Artemis on November 8, 2010

Here’s a few extracts from the recently filed third quarter report of Chubb Corp. There was quite a lot of information about their use of catastrophe bonds and what portion of their reinsurance and risk transfer is made up of cat bonds which we thought of interest to our readers. Chubb have been using cat bonds for a few years and have issued three transactions under their East Lane Re SPV.

Extracts from the quarterly report:

Net premiums written were $8.4 billion in the first nine months of 2010 and $2.7 billion in the third quarter, compared with $8.3 billion and $2.7 billion, respectively, in the comparable periods of 2009.

The combination of the North American catastrophe treaty and a portion of the catastrophe bond coverages provide coverage for United States and Canadian exposures of approximately 69% of losses (net of recoveries from other available reinsurance) between $500 million and $1.37 billion and 60% of losses between $1.37 billion and $1.65 billion. For catastrophic events in the northeastern part of the United States and in Florida, the combination of the North American catastrophe treaty, the supplemental catastrophe reinsurance and the catastrophe bond coverages provide additional coverages as discussed below.

The catastrophe bond coverages generally provide reinsurance coverage for specific types of losses in specific geographic locations. They are generally designed to supplement coverage provided under the North American catastrophe treaty. We currently have three catastrophe bond coverages in effect: a $250 million reinsurance arrangement that expires in 2011 that provides coverage for homeowners-related hurricane losses in the northeastern part of the United States; a $200 million reinsurance arrangement that expires in 2011 that provides coverage for homeowners and commercial exposures for loss events in the northeastern part of the United States (for losses occurring elsewhere in the continental United States or Canada, the coverage is limited to $55 million); and a $150 million reinsurance arrangement that expires in 2012 that provides coverage for homeowners-related hurricane losses in Florida.

For catastrophic events in the northeastern part of the United States, the combination of the North American catastrophe treaty, the supplemental catastrophe reinsurance and certain catastrophe bond coverages provide additional coverage of approximately 40% of losses (net of recoveries from other available reinsurance) between $1.37 billion and $2.17 billion, approximately 90% of losses between $2.50 billion and $2.85 billion, and approximately 30% of homeowners-related hurricane losses between $1.47 billion and $2.30 billion.

Page 27 For hurricane events in Florida, we have reinsurance from the Florida Hurricane Catastrophe Fund (FHCF), which is a state-mandated fund designed to reimburse insurers for a portion of their residential catastrophic hurricane losses. Our participation in this program limits our initial retention in Florida for homeowners-related losses to approximately $155 million and provides coverage of 90% of covered losses between approximately $155 million and $560 million. Additionally, certain catastrophe bond coverages provide coverage of approximately 50% of Florida homeowners-related hurricane losses between $850 million and $1.15 billion.

The above makes it obvious how much Chubb rely on catastrophe bonds to boost their reinsurance coverage, cat bonds make up a big chunk of their U.S. coverage. Their last issuance was East Lane Re III in Feb 2009 but they¬† have yet to issue an East Lane Re IV. With some of their catastrophe bond coverage expiring in 2011 it’s likely Chubb will return to the cat bond market soon.

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