U.S. domiciled global insurance and reinsurance group Chubb demonstrated the effectiveness of its reinsurance program in the third-quarter, as its results reveal the firm ceded roughly 34% of its catastrophe losses to reinsurance capital.
Chubb retained its pre-announced $450 million of catastrophe losses for the quarter, largely driven by the impacts of hurricane Florence, severe convective weather and hail in the United States, and typhoon Jebi in Japan.
But its gross losses for the quarter amounted to $685 million, meaning the firm had passed on the roughly 34% or $231 million of its losses (plus $4m of reinstatement premiums) to its reinsurance program partners, which likely included at least some losses falling to third-party capital.
Of course, with Chubb it is hard to know how much of the total ceded will have gone to externally managed third-party capital, through the likes of ILS funds and collateralized participation in its reinsurance program, versus how much of the losses will have been ceded to its own ABR Re platform, the total-return and third-party capitalised reinsurance joint venture with Blackrock.
The largest hit to Chubb in Q3 2018 was an aggregation of losses across 10 U.S. severe weather, tornado, hail and wind events that drove $250 million of losses on a gross basis. However, here the reinsurance program really showed its worth, with Chubb’s net loss only $95 million from these 10 events.
The next largest loss and the largest single event of the quarter for Chubb was hurricane Florence, which drove $209 million of gross losses, but after ceding $48 million of the impact to its reinsurance Chubb only retained $161 million of losses from that storm.
A Colorado rain and hail storm was the next largest loss, driving a $74 million gross loss. But here the reinsurance wasn’t so effective, as $71 million was retained net.
Typhoon Jebi drove $61 million of net losses, which reduced to $52 million gross after reinsurance. Typhoon Mangkhut drove $17 million of gross losses, which came down to $16 million net of reinsurance.The Japanese flooding drove $17 million of gross loss, which reduced to $13 million after reinsurance. While the California wildfires in the quarter only resulted in an $8 million loss, both on a gross and net basis as this failed to trigger the reinsurance it seems.
Other catastrophe losses during the quarter resulted in $49 million of gross losses, which reinsurance reduced to $38 million net.
It’s interesting that the 10 U.S. severe and convective weather events saw the largest proportion of the loss ceded to reinsurance, suggesting Chubb’s aggregate reinsurance program is particularly effective for the firm.
But overall, passing on roughly 34% of catastrophe loss activity is high, for a re/insurer with the scale of Chubb.
It’s possible that the ABR Re platform took a reasonable share of these losses, as it is an efficient form of reinsurance capital for Chubb, offering benefits through the total return, as well as through the fees and commissions Chubb shares in, and lower ceding fees.
Chubb reported core operating income of $1.1 billion for Q3 2018, compared with a loss of -$60 million for the prior year. Hence this quarter’s catastrophe activity has for Chubb been a little lower than anticipated and with its reinsurance program performing so well the company has controlled its exposure to the losses which have caused some surprise at other firms.
Evan Greenberg, Chairman and CEO of Chubb, commented on the results, “As a global insurer with operations in 54 countries, we experienced an active quarter for natural catastrophes around the world, and Chubb’s underwriting excellence once again distinguished the company. We produced core operating income of $1.1 billion, or $2.41 per share, and a P&C combined ratio of 90.9%. Excluding catastrophes, our combined ratio of 84.8% reflects strong current accident year EPS, up 5% over prior year, and a nice contribution from positive prior period reserve development. The quality and balance of our earnings this quarter were evident, with P&C underwriting income of $669 million and net investment income of $883 million.
“Global P&C net premiums written, which exclude agriculture, increased 4% in the quarter in constant dollars. We had good growth in our U.S. commercial P&C divisions and simply excellent growth in our international P&C business. In our U.S. commercial P&C business excluding agriculture, net premiums increased 3.6%, or 4.6% excluding merger-related actions, which are now substantially completed and will be behind us after one more quarter. We achieved even stronger growth in our Overseas General operations, which include both commercial and consumer lines, with premiums up 7.5% in constant dollars. Our global presence and the expanded capabilities of today’s Chubb allow us to take advantage of growth opportunities in many areas without sacrificing underwriting standards.
“Commercial P&C pricing for the business we wrote was consistent with the prior quarter. Given market conditions, we are trading some growth for an underwriting profit – a proven strategy that requires discipline. We’re confident and optimistic about our ability to outperform the balance of the year and beyond.”