Insurer taps capital markets for first time

Property/casualty insurer Chartis, a subsidiary of American International Group, has obtained $425m in reinsurance protection against US hurricanes and earthquakes through a catastrophe bond – the first time the insurer has tapped the capital markets for coverage.

The insurer has entered a reinsurance agreement with Lodestone Re, a Bermuda-based special purpose vehicle, which in turn has issued a catastrophe bond to investors in two tranches – $175m of class A notes and $250m of class B notes – to fund its obligations.

The transaction, which closed on May 12, provides Chartis with fully-collateralised coverage on a per-occurrence basis until May 13 using an index trigger with state-specific payment factors. Risk analysis for the transaction is based on catastrophe modelling firm Risk Management Solutions’ Hurricane Model Version 9.0 and North America Earthquake Model Version 9.0.

Lodestone Re’s structure enables it to issue more catastrophe bonds in future.

“As part of our first effort to obtain reinsurance coverage supported by capital market instruments, this transaction represents another important milestone in Chartis’ pursuit of increasing financial flexibility and enhancing our risk management capabilities,” said Kristian Moor, president and chief executive officer of Chartis, in a statement.