Chubb seems to think loaning TSF $91M is a "sound investment"

[CincyDem]

5. Depends on the interest rate and collateral. Insurance companies are very (very) good at pricing "risk"

Insurance is the business of buying/selling "risk" so it's not surprising that he'd reach into the insurance industry for the money. In effect, they're acting as his bail bondsman. And relative to Chubb's balance sheet, the reality is if they lose 100%, they probably won't notice it.

While the morals might be questionable, to quote Tessio in the Godfather..."Mike, it's just business".

Interest rate

They'll start with the risk free rate, usually the current Federal Funds rate...5.5%. That's what they can get on their money today without taking any risk.

From there, they'll add several factors to get a final rate on the note. Probably a hard money factor (i.e. borrower is strapped for cash)...call it +4-5%. Then they'll add a business risk factor where they'll consider the borrower's likely ability (and in this case willingness) to repay the loan. I've seen business risk factors upwards of 8-10% and there's no reason to believe Trump would get substantially lower...but let's just say Chubb's got some kind of political calculus in this so they give him a deal at 6%.

Net, he's probably got a 15-16% rate on the note. Probably no lower but possibly much higher.

Collateral

When you get a mortgage and borrow money from the bank, your house is the collateral. You put down 20%, they loan you 80% BUT...if you default, they take 100% of the house...you're collateralized at 125% (i.e. the bank lends you 80 but they recoup 100 on default for a gain of 20 on their 80...25%). Depending on how easy it is for the bank to turn that collateral into cash and their view of what the market might be for that collateral over the life of the loan, they could easily want 150-200% collateral...but let's say Chubb's got that same political calculus here and they give it to him a deal...150%

So...in round numbers...Chubb loans $90million, gets a little over $1million/month in interest (maybe more) and holds $135million in collateral. For an insurance company that usually makes 4-5% on their money...15% if he pays and 8-9%/year if he defaults is a good deal for them. After court fees to recover collateral if he defaults, they probably net 6% or so on their money worst case...not a bad deal for them.

We'll likely never know the inner workings of the deal but I guarantee you, Chubb has priced in every risk and it's a good business deal for them.

IMHO.