Skyline Re Ltd. (Series 2014-1)

The 2014 Skyline Re cat bond deal sees Cincinnati Insurance returning to the capital markets for an increased source of reinsurance protection. The 2014 Skyline Re cat bond is not just larger in size than the 2013 issuance, it is also Cincinnati’s first multi-year deal, providing it with three years of cover compared to the 1 year Skyline 2013.

So, the Skyline Re 2014-1 cat bond provides Cincinnati Insurance with a three-year source of fully-collateralized reinsurance protection for certain of its earthquake and severe convective storm (thunderstorm, tornado and hail) risks.

The cat bond has been cleverly structured to provide Cincinnati Insurance with per-occurrence protection for its earthquake risks and annual aggregate protection for its severe thunderstorm risks. Skyline Re 2014-1 uses an indemnity trigger, as did the insurer’s 2013 cat bond deal.

The coverage provided by this cat bond is broader than in the Skyline Re 2013 deal. Earthquake coverage is for a larger territorial area, the 2013 deal covered only the New Madrid quake zone, although the 2014 deal does not cover California. The severe convective storm coverage is regional, as was the Skyline 2013 deal, but it provides cover for a larger area in the 2014 issuance.

Steve Johnston, President and CEO of Cincinnati Financial, commented on the coverage provided by Skyline Re 2014; “The coverage applies to severe convective storm losses in selected areas as well as supplemental coverage in the event of an earthquake.”

Coverage has been expanded in the 2014 Skyline Re catastrophe bond in a number of ways. The earthquake coverage has been expanded by adding a number of additional states to the deal, so providing earthquake cover for more than just the New Madrid quake zone, which is where the 2013 cat bond was focused.

Johnston explained; “In addition to the coverage provided last year related to the New Madrid fault line, it includes several states in the Pacific Northwest.”

The coverage for severe convective storms (so thunderstorm, tornado and wind from convective storms as well as hail) was also expanded geographically. The 2013 Skyline Re cat bond had a county focused coverage approach, where as the 2014 deal expands to offer protection across full states.

Johnston elaborated; “For both coverages, convective storm and earthquake, the geography related to the coverage was expanded for 2014. The program now generally covers entire states where we have significant amounts of insured property risks instead of just selected counties.”

Finally, Johnston gave some detail on the indemnity trigger, a fact not revealed previously about the Skyline Re 2014 cat bond. As we wrote in our article announcing the Skyline Re 2014 cat bond a few weeks ago, the indemnity trigger provides cover on a per-occurrence basis for earthquake risks and annual aggregate for severe thunderstorm.

Johnston revealed on the call that the indemnity trigger sits at $160m, with each event having a $5m deductible.

Johnston said; “The storm aggregate coverage provides loss recovery once losses for all events in aggregate exceed $160 million after a $5 million deductible per event.”

The transaction was launched with initial price guidance of 15% to 16%. This was revised as investor demand for the transaction built up and was reduced to 14% to 15%. Final pricing for the notes was a coupon of 14%, right at the bottom end of the reduced range. That’s effectively a 10% decline in transaction pricing from the middle of the launch guidance range.

The risk modelling for this transaction was undertaken by the investors. The investors are provided with a considerable amount of information, these transaction are not really light on documentation and supporting materials despite them often being referred to as cat bond lites, to allow them to do this.

JLT Capital Markets acted as both structuring agent and bookrunner for this transaction.

The Skyline Re 2014-1 cat bond transaction officially closed on the 23rd January.