Global insurance and reinsurance firm Chubb revealed an estimation of its losses from hurricane Harvey and Irma’s impacts on the United States and the Caribbean, with the firm suggesting up to $1.6 billion of loss, pre-tax and net of reinsurance, some of which is likely to fall to its total return reinsurance vehicle ABR Re.
Chubb revealed a preliminary loss estimate for Hurricanes Harvey and Irma’s impacts in Texas, Florida, other southeastern states and the Caribbean, with around $650 million pre-tax, or $520 million after tax, from Harvey, and losses ranging from $800 million to $950 million pre-tax, or $640 million to $760 million after tax, from Irma.
Chubb’s estimates are after reinsurance, including reinstatement premiums and consist of losses suffered in the company’s commercial and personal property and casualty insurance units, as well as any losses through its reinsurance operations.
“The catastrophes we have experienced in the last five weeks, including Hurricanes Harvey, Irma and Maria, and the earthquakes in Mexico, have been significant events, causing both a tragic loss of life and considerable property and infrastructure damage,” explained Evan G. Greenberg, Chairman and Chief Executive Officer. “Our thoughts are with everyone affected by these disasters, including our customers, business partners and employees. Our first job at Chubb is to support them in their time of need and we are bringing to bear all of the resources of our organization to do that.”
Part of the reinsurance support Chubb will have called on to help it pay losses from hurricanes Harvey and Irma will be third-party capitalised, as the insurer does use collateralized coverage to a degree we understand.
However, Chubb also has its third-party investor capitalised, total-return strategy vehicle ABR Reinsurance Ltd. (ABR Re), which will almost certainly have shared in its losses from the recent hurricanes.
Chubb cedes a significant amount of business to ABR Re, using the vehicle as an internal reinsurer, capitalised by third-party investors, while venture partner and investment giant BlackRock acts as the investment manager aiming to boost the reinsurance vehicles returns.
Chubb benefits from fee income and underwriting fees, as well as the lower cost of ceding risks to its own reinsurer, which make the vehicle an efficient way for it to manage its exposures, while also generating income. Essentially, these total-return strategies help the sponsor to generate higher levels of income from premiums underwritten, a key trait of successful companies in the competitive and evolving re/insurance marketplace.
Chubb ceded $280 million of premiums to ABR Re in 2016, which was a 144% increase on the $115 million ceded to it in 2015. It’s safe to assume that the amount of premiums ceded to ABR Re grew for the current underwriting year as well.
ABR Re can participate as a reinsurer on risks including non-life insurance, non-property catastrophe reinsurance and property catastrophe reinsurance contracts that are underwritten by Chubb.
The vehicle can also underwrite third-party business, but the majority in 2016 was sourced from Chubb, so we’d assume the same is the case in 2017.
As a result, we’d anticipate that ABR Re is set to experience some losses due to recent catastrophe events, helping Chubb as a reinsurer, which could potentially hit the vehicles returns to its investors this year.
For Chubb, this is exactly what ABR Re was set up to do. Provide it with an efficient source of reinsurance, help it to take some its risks out of the reinsurance renewal cycle so reducing costs, add additional income through profit shares on the investments and underwriting fees earned, all while being there to provide protection when major losses occur.
In some ways ABR Re acts as a kind of reinsurance or retro sidecar, bringing third-party capital into Chubb’s overall business structure, with the added benefits of higher investment return targets and the fee income the insurer earns as well.
One things for sure, if ABR Re does pay a chunk of Chubb’s catastrophe losses in 2017 the insurer will not be facing such steep prices rises for the coverage in the next year as it would in the private reinsurance market.
The benefits of owning your own reinsurance vehicle, backed by third-party investors are clear, which is why some analysts urge re/insurers to look to the capital markets rather than raising new equity after recent major losses.