U.S. winter storm losses build. What about catastrophe bonds?

by Artemis on February 3, 2014

Winter storms are a covered peril in a number of outstanding catastrophe bond transactions currently. With the U.S. having suffered from a number of severe spells of winter weather in recent weeks, losses are mounting and some bonds may begin to look exposed.

The United States has seen temperatures tumble and winter storm conditions have been prevalent much further south than is typical of the U.S. winter during this season. A weather phenomenon know as the polar vortex is largely to blame, caused by the position of the jet stream channeling frigid air from the Arctic down across much of the U.S.

While the northern U.S. states have been experiencing spells with temperatures significantly below freezing, heavy snowfalls, ice storms and a general deep freeze on and off for some weeks, the cold weather has had a much wider impact than is normally expected.

Freezing temperatures and snow have been experienced in locations as far south as Florida and Texas, causing unusual losses in agriculture, property, auto and other lines of insurance business. With the most recent spell of polar air causing a freeze extending almost to the deep south the amount of insured losses suffered by primary carriers in this winter season is expected to be significant.

Just the other day insurer Chubb reported its fourth quarter earnings and gave an update on winter storm losses which have impacted the firm in January. Chubb estimates that losses from two declared winter storm catastrophes between the 3rd and 8th of January across 19 states will amount to $150m to $200m before tax.

Dino Robusto, EVP and President of Commercial and Specialty Lines at Chubb, said of the two declared catastrophes; “I think it’s safe to assume, when all company personal and commercial losses are tallied up, these catastrophes are going to represent a substantial industry event.”

Chubb expects its non-catastrophe losses in January will be above normal as some other spells of freezing weather and winter storms have not been declared as catastrophes officially.

Chubb’s estimate is only for that period and the most recent spell of freezing weather and winter storms is not included. For one insurer, no matter how large Chubb is, to declare losses of that size shows the extent of the impact that this seasons freezing conditions and winter storms have had on U.S. insurers.

Agricultural losses are expected to hit some insurers and for those operating in Canada as well there will be more woes as many areas of Canada have experienced particularly low temperatures and freezing conditions this winter.

So, insured losses from winter storms, freezing weather, ice storms and snowfall are mounting as we move through the winter season. That means that any sponsors of catastrophe bonds which provide reinsurance protection against the peril of winter storm could begin to look at risk, particularly any cat bonds with aggregate triggers which accumulate losses over a season.

Looking down through the Artemis Deal Directory of issued catastrophe bonds the first cat bond with winter storm exposure is insurer USAA’s most recent transaction Residential Reinsurance 2013 Ltd. (Series 2013-2).

ResRe 2013-2 is famous for having perhaps the most risky tranche of cat bond notes ever issued, with an expected loss of over 13% on the Class 4 notes which attach at $400m of losses to USAA. These protect USAA on a per-occurrence basis, meaning that a single catastrophe event would have to cause the insurer over $400m of losses for the notes to be triggered.

Now this doesn’t seem very likely at the moment, but with the insurer having significant exposures in the regions worst affected by the winter storms and in some affected areas it having a larger footprint that Chubb, the losses from winter storms at USAA must be meaningful.

USAA also has a number of other Residential Re cat bonds outstanding, all of which provide some winter storm protection to the insurer. USAA also has some aggregate protection from its outstanding cat bonds, such as the Residential Reinsurance 2013 Ltd. (Series 2013-1) Class 11 notes.

These Class 11 notes do not attach until USAA suffers over $1 billion of qualifying losses, so it is unlikely that the winter storms alone would reach the trigger. Of course these notes also provide aggregate protection across a range of perils, including hurricane, earthquake, thunderstorm and wildfire, so if losses from winter storms have reached above the franchise deductibles and qualified then the attachment point may have been reduced.

USAA’s Residential Reinsurance 2012 Ltd. (Series 2012-1) also has an aggregate layer of protection within it, so again is likely one of the more at risk cat bonds from recent winter storms. Again it would only be qualifying losses reducing the attachment point during the current risk period that is a risk for this cat bond, we imagine.

Another aggregate cat bond covering winter storm risks is Combine Re Ltd. (Series 2012-1). This cat bond, protecting Swiss Re America’s two reinsureds, Country Mutual Insurance Company and the North Carolina Farm Bureau’s mutual insurance arm, could also see some form of aggregate loss qualifying from the winter storms if losses from the two sponsors were significant enough.

Finally, Chubb itself has the East Lane Re IV Ltd. (Series 2011-1) catastrophe bond, which provides it with some reinsurance protection for winter storm losses. This cat bond however is safe as it is a per-occurrence trigger with high attachment points, designed to protect Chubb against the most severe events only, while this winter storm season is definitely an aggregate type of event.

At the moment it looks like all winter storm exposed catastrophe bonds will be safe from any principal losses to their investors. However there may be some erosion of the aggregate layer protection on some cat bonds, if the specific declared catastrophe events result in sufficient to breach retention or deductibles and begin to eat into aggregate loss totals.

It’s impossible for Artemis to confirm whether this will be the case as yet, reports from rating agencies are likely to be the first sign of any qualifying losses for any exposed cat bonds. However, this seasons winter storms and severe polar freezes should serve as a reminder that winter storm is a peril which has the potential to place cat bond investors at risk and therefore should be treated with the respect that any other peak peril demands.

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