During the first-quarter earnings call of U.S. primary insurance group Chubb the insurers CFO Richard Spiro discussed Chubb’s recently completed East Lane Re VI Ltd. catastrophe bond, hailing it as the lowest pricing ever achieved on a U.S. hurricane cat bond.
Chubb, a regular sponsor of catastrophe bonds with six cat bond transactions now under its belt. Deals completed include 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, East Lane Re V Ltd. in March 2012 and most recently East Lane Re VI Ltd. in March 2014.
The most recent cat bond from Chubb, East Lane Re VI, launched as a $225m multi-peril deal through which Chubb was seeking fully-collateralized reinsurance protection against losses from U.S. named storms, earthquakes, severe thunderstorms and winter storms.
The East Lane Re VI cat bond was replacing the cover provided by East Lane Re IV, but also providing broader protection in terms of perils.
Richard Spiro explained; “In March we successfully completed our sixth catastrophe bond offering, East Lane VI, to replace a maturing cat bond. The transaction was very well received by the market and this enabled us to increase the limit from $225 million to $270 million and expand the perils covered, relative to the expiring arrangement, at attractive pricing.”
Spiro described the coverage provided by East Lane Re VI; “Under this new arrangement, we purchased fully-collateralized multi-year coverage to supplement our reinsurance program for the perils of named storm including hurricane and tropical storm, earthquake, winter storm and severe thunderstorm in the northeast U.S. running from Virginia to Maine.”
But while the growth in limit was welcomed and the expansion of coverage a benefit to Chubb’s overall reinsurance protection it is the pricing which really stood out for Chubb.
“In terms of pricing, we attained the lowest pricing ever achieved on a cat bond with U.S. hurricane risk,” Spiro said.
The East Lane Re VI cat bond launched with price guidance of 3% to 3.75%. That was subsequently reduced down to 2.75% to 3% and when the deal completed the pricing settled at the lowest end at 2.75%. This, at the time, was perhaps the lowest coupon seen on a catastrophe bond containing U.S. hurricane exposures.
Spiro went on to explain the cat bonds coverage; “Similar to our previous cat bonds we have an indemnity-based trigger, which means that our right to collect is based on our actual incurred losses, as opposed to industry or index-based losses.”
Primary insurers such as Chubb are increasingly attracted to an indemnity trigger where the lines of business are appropriate. Not all primary insurers choose this trigger though, some still preferring to protect themselves on an industry loss basis.
Finally, Spiro explained what it is Chubb likes about its catastrophe bonds; “We like the diversification that these cat bond arrangements bring to our overall reinsurance program, especially in our peak zone. Importantly, they provide us with a cost-effective fully-collateralized alternative to traditional reinsurance with pricing locked in for several years.”