Combine Re cat bond notes upgraded after aggregate loss total annual reset

Ratings agency Moody’s has upgraded the $50m of Class B catastrophe bond notes issued by Combine Re Ltd. in March 2012 after the deals annual reset. The notes had been downgraded in August 2012 after a number of severe thunderstorm and tornado events qualified under the terms of the cat bond as aggregate losses. The recent annual reset for the Combine Re deal saw the annual aggregate ultimate net losses reset to zero and as a result of the reduced chance of loss the notes have been upgraded again.

The Combine Re cat bond was sponsored by Swiss Re America but actually provides reinsurance protection for two reinsured parties, Country Mutual Insurance Company and the North Carolina Farm Bureau’s mutual insurance arm, who are both the deals beneficiaries. The deal involved the securitization of $200m of multi-peril annual aggregate indemnity protection via SPV Combine Re Ltd.

The transaction was feted as the first catastrophe bond combining the risk of two reinsured parties into a single transaction, opening the way for other similar deals after investors readily accepted the notes. It provides cover on an indemnity basis and can be triggered by the ultimate net losses of the two reinsureds from the U.S. hurricanes, U.S. earthquakes, U.S. severe thunderstorms and U.S. winter storms. Three tranches of notes all exposed to all of the risks were issued, but only two were rated by Moody’s.

The first events to threaten Combine Re were a number of severe thunderstorm events, which were designated as PCS Catastrophe No. 74, PCS No. 77 and PCS No. 83, and had combined qualifying losses totalling $110.3m. The three events corresponded to severe thunderstorms that occurred on 28th-29th April, 6th-7th June and 28th June-7th July, respectively.

The attachment point for the Class B notes was just $300m, so these events left them needing just $189.7m more qualifying losses to cause a loss of principal to reduce a layer of reinsurance retention after which the losses would begin to eat into the attachment point. It was these thunderstorm events which led to the downgrade of the $50m Class B tranche of notes by Moody’s.

Two other events also qualified under the terms of the deal and further eroded the cat bonds protection reinsurance retention layer. First hurricane Isaac in September was deemed a qualifying event and then in November hurricane Sandy followed suit.

Now though, the Combine Re cat bond has had its first annual reset, at which point the annual aggregate loss total is reset to zero and begins counting up again on any future qualifying catastrophe events. As a result of this Moody’s says there is a reduced likelihood of losses to the Class B notes and as a result it has upgraded them.

The $50m of Class B notes have been upgraded to ‘Ba2′ by Moodys’ from the ‘B1’ they had been downgraded to in August. At the same time Moody’s has affirmed the $100m Class A notes. Moody’s said that “The likelihood of occurrence of the number of qualified events required to attach the different classes of rated Notes as well as the expected losses for each of them has been significantly reduced.”

Interestingly Moody’s has not upgraded the Class B notes back to the level they were rated at on issuance (which was ‘Ba3’) and they don’t explain why this is. It is possible that it is because hurricane Sandy losses continue to be counted, or it may just be that on reflection they consider the notes slightly more risky than they did at initial rating. The next risk period is for one year where as the one just ended only ran since issuance in March, so the Combine Re deal has a longer period to get through without losses this year, so that could be another factor in Moody’s decision.