Skyline Re Ltd. (Series 2017-1)

This Skyline Re 2017-1 transaction is a three-year, privately placed catastrophe bond, which closed on the 7th February 2017, and offers Cincinnati Insurance a fully collateralised source of indemnity based reinsurance protection against losses from earthquakes and severe thunderstorm (convective storm).

The Skyline 2017-1 private cat bond is structured in two classes of notes, with a $100 million Class 1 tranche covering U.S. earthquake risks (excluding California) only on a per-occurrence basis, while an $80 million Class 2 tranche features two sections covering U.S. earthquake risks (excluding California) and U.S. convective storm losses (excluding Florida), respectively on a per-occurrence and annual aggregate basis.

The Class 1 tranche of earthquake only per-occurrence exposed notes will pay investors a coupon of 2.5%, we understand. The Class 2 tranche, with two sections for per-occurrence earthquake and aggregate convective storm losses, is considerably riskier and will pay investors a coupon of 12%. The attachment point for the Class 2 convective storm section is $190m of losses.

Cincinnati Insurance also entered into an additional $20 million three-year collateralised reinsurance contract for further U.S. earthquake protection, which takes the total collateralised earthquake protection from this arrangement to $200 million.

Update:

Cincinnati Financial reported that severe convective storm activity in 2017 had eroded the deductible sitting beneath the SCS section of the Class 2 notes.

By the end of Q1 2017 the aggregated qualifying losses had reached $106 million, with three severe thunderstorm events largely to blame. The tally rose further to $119 million by the end of Q2 2017.

With the attachment point for the severe convective storm section of the Class 2 notes sitting at $190m the deductible had been 62% eroded by the 30th June 2017.

Update, April 2018:

Cincinnati Financial reported that severe convective storm activity in the first-quarter of 2018 had eroded the deductible sitting beneath the severe convective storm section of the Class 2 notes by $23 million.

Three convective storm outbreaks qualified and their losses surpassed the per-occurrence deductible during the period, once again heightening the risk that future storm impacts could eroded the deductible further.

Update, July 2019:

Cincinnati Financial said that in the first-half to June 30th 2019, six specific severe convective storm events qualified under the terms of the cat bond and in each case their losses exceeded the $8 million per-occurrence deductible that is in place.

Aggregate losses across those six storm events reached $141 million, after the deductible, which is just over 74% of the way to the $190 million attachment point for the Skyline Re 2017 Class 2 notes $80 million layer of reinsurance coverage.

The fully collateralized reinsurance Skyline Re’s Class 2 notes provide Cincinnati would allow it to make a recovery from the bonds investors if losses, after the deductible, exceeded $190 million during this last of the issuance’s annual risk periods.

Update, October 2019:

Aggregate losses continued to qualify and beat the deductible, leading the insurer to report that by the end of Q3 2019 eight storm events where losses were above the $8 million deductible had met the requirements for recovery, aggregating to $150 million of losses, so now 79% of the way towards the cat bond trigger.