Cincinnati’s Skyline Re cat bonds aggregate retention 32% eroded after Q3

The aggregate buffering layer and retention sitting beneath the convective storm coverage of Cincinnati Financial Corporation’s $180 million Skyline Re Ltd. (Series 2017-1) catastrophe bond had been 32% eroded due to qualifying catastrophe losses by the end of the third-quarter of this year.

The Skyline Re cat bond was sponsored in January 2017 by The Cincinnati Insurance Company, part of the Cincinnati Financial Corporation.

The $180 million Skyline Re 2017-1 cat bond provides the insurer with $80 million of aggregate severe or convective thunderstorm collateralized reinsurance protection, through a dual-section Class 2 tranche of notes. It is this tranche of notes that has repeatedly been exposed to an erosion of the aggregate retention due to severe weather in the United States.

Earlier this year Cincinnati Financial revealed that in the first-quarter of 2018 severe convective storms had eaten $23 million of the way through the retained layer of the aggregate collateralized reinsurance coverage provided by the cat bond.

That erosion of the aggregate retention or buffer has continued through the rest of the year, with the insurer now revealing that its qualifying losses have eaten 32% of the way towards the cat bonds trigger.

Under the terms of the Skyline Re 2017-1 cat bond, the collateralized reinsurance it provides would allow Cincinnati to make a recovery from the bonds investors if its aggregate losses, after an $8 million per-event deductible is applied, exceeded $190 million during an annual risk period.

So the attachment point for the Class 2 convective storm section of reinsurance coverage is $190m of losses and the insurer said that the aggregate losses from eight events that occurred between January 1st and September 30th 2018 have eaten further into the buffer for this tranche of cat bond notes.

The eight severe convective storm events have now resulted in $61 million of qualifying losses, after the cat bonds per-occurrence deductible is taken into account.

So that’s 32% of the way towards the cat bonds trigger by three-quarters of the way through the year, which suggests that with the risk period set to end at December 31st there is a very strong chance the bond survives the risk period with no loss of principal.

In 2017, the Skyline Re cat bonds aggregate deductible was eroded by over 60% by the middle of the year, but still survived as convective storm activity tends to lessen through the second-half. Hence it seems likely to survive its second year as well.

This is a catastrophe bond acting as it should do, managing the loss activity the sponsor suffers and ready to pay out should its losses reach the point where the coverage was purchased to kick-in.

The erosion of the aggregate layer beneath the Skyline Re cat bond trigger has not affected its pricing in the secondary market, suggesting investors feel comfortable that it will reach the end of the current risk period without facing losses.