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Chubb likes cat bonds for diversification, cost and coverage: CFO Spiro


U.S. primary insurer Chubb appreciates the diversification that catastrophe bonds bring to its reinsurance programme, as well as the low pricing and five-year term of its latest deal, East Lane Re VI Ltd. (Series 2015-1), according to CFO Richard Spiro.

Chubb completed the $250m East Lane Re VI Ltd. (Series 2015-1) multi-peril cat bond in March, making it the insurers seventh visit to the cat bond market since 2007, which in total have secured the insurer $1.75 billion of fully-collateralized, multi-year, multi-peril reinsurance protection for its peak zone risks.

During the insurers first quarter earnings call yesterday, EVP and CFO Richard Spiro discussed the latest East Lane cat bond issuance and how Chubb appreciates the reinsurance coverage that capital markets investors provide.

“In March we successfully completed our seventh catastrophe bond offering to replace our maturing cat bond,” Spiro began, referring to the maturation of one tranche of the East Lane Re IV Ltd. (Series 2011-1) transaction.

The East Lane Re VI 2015-1 saw a similar layer of risk transferred to insurance-linked securities (ILS) investors in the capital markets, replacing and also upgrading the reinsurance coverage the matured deal provided.

“The transaction was very well received by the market. This enabled us to replace the existing limit of $250 million and expand the perils covered relative to the expiring arrangement at attractive pricing,” Spiro continued.

In the 2015 East Lane Re cat bond, Chubb transferred a greater range of risks to the capital markets than ever before. The cat bond perils include U.S. named storms, earthquakes, severe thunderstorms, winter storms, wildfires, volcanic eruption, meteorite impact.

For Chubb this was the first time it had included wildfire risks, volcanic eruption risks and, of course, meteorite risks, within one of its catastrophe bonds. Getting this peril expansion at much reduced pricing, given the decline in property catastrophe rates, makes the return to the cat bond market extremely beneficial.

“Under this new arrangement we purchased fully-collateralized five-year coverage, to supplement our reinsurance program, for our commercial and personal property exposures in the Northeast United States running from Virginia to Maine,” Spiro said.

The duration of the cat bond is the longest Chubb has issued. A few of its previous tranches had four-year terms, but this is the first five-year cat bond from the insurer.

When it comes to pricing there are a few years between the issuance of the matured East Lane and the 2015 cat bond. The price therefore would be expected to have declined, but Spiro of Chubb explained precisely how much.

“In terms of pricing, the coupon on the new cat bond is approximately 45% lower than the maturing bond,” he explained.

A 45% drop in pricing, for a similar layer of risk but with three additional perils included and a year longer term should be considered a positive outcome for any insurers reinsurance renewal.

Explaining the coverage, Spiro said; “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.”

Spiro then explained why Chubb finds the cat bond market attractive, which comes down to flexibility, cost and diversity among risk capital sources.

“We like the diversification that these cat bond arrangements bring to our overall reinsurance program especially in our peak zones,” he said.

“Importantly, it provides us with a cost-effective, fully-collateralized alternative to traditional reinsurance with pricing locked in for several years.”

Chubb has almost constantly had an in-force catastrophe bond within its reinsurance programme since 2007. With another positive experience from the cat bond market in 2015, it’s safe to assume that Chubb will be back in years to come to further expand its use of ILS protection.

Read about all seven of Chubb’s East Lane catastrophe bond issues in the Artemis Deal Directory.

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