We’ve covered the recently completed Skyline Re Ltd. (Series 2013-1) private catastrophe bond placement in some detail in our original article announcing the transaction and a follow-up where we talked at some length with Towers Watson Capital Markets (TWCM) about its role in structuring and placing the cat bond. However to date we had not written about the specific attachment, or trigger, points for the cover, but these have now been revealed by Cincinnati Financial.
To refresh your memories, the deal involved a single tranche of cat bond notes being privately placed with capital market investors to collateralize an underlying reinsurance policy for The Cincinnati Insurance Company. The deal covers a $100m layer of risk, with a pro-rata limit of $72m which has been collateralized by the $61.2m of notes issued by Skyline Re and the net premium.
The cat bond transaction has a term of just one year, during which The Cincinnati Insurance Company benefits from a $72m of limit fully collateralized source of reinsurance cover for certain of its New Madrid earthquake risks and severe convective storm or tornado risks. The deal uses indemnity triggers for both perils, with the New Madrid earthquake cover being on a per-occurrence basis and the convective storm cover being on an aggregate basis.
To date we had no information on the levels of indemnity losses Cincinnati needed to suffer before the cat bonds investors began to face losses, but in a recent earnings call, Steve Johnston, President and CEO of Cincinnati Financial, revealed some details which fill in some gaps.
Johnston said that in 2013 Cincinnati Financial have added a $100 million layer of reinsurance with its share of covered losses in that layer at 28% through collateralized reinsurance in the form of a catastrophe bond, referring to the Skyline Re deal.
He explained that the coverage that Skyline Re, and this layer of its reinsurance program provides, applies to severe storm losses in selected areas particularly in the Midwest, as well coverage for earthquake events occurring along the New Madrid fault line.
Severe thunderstorm, which includes tornado losses, is on an aggregate basis and applies to the 75 counties with Cincinnati’s highest amount of total insured property values, said Johnston. As we understand it the earthquake coverage is not county limited, rather it applies to any quakes on the New Madrid fault zone causing Cincinnati losses in pre-defined States.
For severe thunderstorm risks, Johnston explained that loss recovery under the terms of the reinsurance treaty begins when all events in aggregate exceed $125m of storm losses, after a $5m deductible per event. For New Madrid earthquake risks, which provides protection on a per-occurrence basis, insured losses have to exceed $600m before any loss to the Skyline Re cat bond would occur.
Johnston went on to explain that Cincinnati Financial sees its reinsurance protection as an important part of its enterprise risk management plans, helping it to protect capital and remove some of the potential for earnings volatility caused by natural catastrophes. Overall Johnston said that Cincinnati managed to add coverage and efficiency to its reinsurance program while keeping costs basically flat this year. He also mentioned further diversifying its sources of reinsurance cover, something that the introduction of a cat bond to the mix will no doubt have assisted with by opening Cincinnati Financials reinsurance program up to the capital markets.
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