U.S. winter storm losses growing. Cat bonds likely safe, for now

U.S. insured catastrophe losses from winter storms in 2014 are likely to reach $2.5 billion plus by year’s end, which would be the fourth costliest year for winter storm losses on record, so could trouble some reinsurance contracts, but not cat bonds yet.

From January 5^th to January 8^th of 2014 the freezing weather phenomenon known as the Polar Vortex struck vast regions of the United States, with the resulting winter storms causing insured losses beyond $1.5 billion, according to Property Claim Services (PCS) and as reported previously by Artemis.

That figure, for insured losses from the Polar Vortex, was already alarmingly close to the $1.8 billion of insured losses from winter storms seen during the whole of 2013 and was actually above the 20 year average for winter storm losses just 8 days into the new year.

Dr. Robert Hartwig, President of the Insurance Information Institute (I.I.I.) and an economist explains; “Severe winter weather is the third-largest cause of insured catastrophe losses, after hurricanes and tornadoes. Losses from snow, ice, freezing and related causes averaged $1.2 billion annually over the past twenty years.”

With recent severe winter weather, such as the Buffalo snow storms and freezing weather across most U.S. states, in the U.S. bringing a reminder of the weather seen at the start of the year, the winter storm insured loss total is expected to grow significantly by the end of December.

Hartwig continued; “This year insured losses from severe winter events will be at least double that amount (the average), likely exceeding $2.5 billion by year’s end, making 2014 the fourth costliest year on record for winter storm losses.”

In fact, the I.I.I. figures were released before the forecasts for the winter storm that will affect the New York metro area today and over Thanksgiving, which could add to the tally. There is also the issue of insured losses due to flooding from snow melt which could have the potential to become an issue if the U.S. warmed suddenly in the coming days.

In fact, winter storms are the third most damaging peril, in terms of insured losses, after tropical storms or hurricanes and tornadoes.

Hartwig explained; “Winter storm claims, including those associated with freezing and ice damage, accounted for 6.4 percent of all insured catastrophe losses between 1994 and 2013, placing it third behind hurricanes and tropical storms (41 percent) and tornadoes (36 percent) as the costliest natural disasters.”

The actual figure for U.S. winter storm insured losses could be much higher, given that reinsurer Munich Re had estimated that winter storms from January to March had already caused insured losses of $2.4 billion. By the end of this year, if the current cold spell and stormy weather continues, the eventual figure for winter storm losses could be much higher than the $2.5 billion, as Hartwig suggested.

Winter storms are increasingly of interest to the catastrophe bond market and insurance-linked securities (ILS) investors, as the number of deals covering this peril increases. Clearly, periods of intense winter storms are unlikely to trigger any per occurrence cat bonds, as one sponsors indemnified losses are unlikely to be high enough, but over the course of a year for an annual aggregate cat bond, winter storm losses could be a contributor to the triggering of a multi-peril catastrophe bond.

Catastrophe bonds that we have listed in the Artemis Deal Directory, which include coverage for U.S. winter storms, are; Residential Reinsurance 2014 Ltd. (Series 2014-2), Residential Reinsurance 2014 Ltd. (Series 2014-1), Riverfront Re Ltd. (Series 2014-1), East Lane Re VI Ltd. (Series 2014-1), Residential Reinsurance 2013 Ltd. (Series 2013-2), Residential Reinsurance 2013 Ltd. (Series 2013-1), Residential Reinsurance 2012 Ltd. (Series 2012-2), Residential Reinsurance 2012 Ltd. (Series 2012-1), Combine Re Ltd. (Series 2012-1), Residential Reinsurance 2011 Ltd. (Series 2011-2), Residential Reinsurance 2011 Ltd. (Series 2011-1) and East Lane Re IV Ltd. (Series 2011-1).

All of the above catastrophe bonds, which are currently in force or about to be in force, cover U.S. winter storms using an indemnity based trigger, so there’s naturally some uncertainty concerning whether a bond will be triggered, for sponsors and investors alike as claims need to be filed and counted.

Of those cat bonds Residential Reinsurance 2014 Ltd. (Series 2014-1), one tranche of Residential Reinsurance 2013 Ltd. (Series 2013-1), two tranches of Residential Reinsurance 2012 Ltd. (Series 2012-1), Combine Re Ltd. (Series 2012-1), Residential Reinsurance 2011 Ltd. (Series 2011-2), one tranche of Residential Reinsurance 2011 Ltd. (Series 2011-1) and East Lane Re IV Ltd. (Series 2011-1), are all providing some coverage for winter storm losses on an annual aggregate basis for their sponsors.

These would, in our opinion, be the most likely to ever be at risk of increasing winter storm losses. Even so, it is more likely that winter storm losses would be just one contributing peril loss to the overall aggregate loss level if these notes were ever to become at risk of principal losses.

2014 looks certain to be an incredibly costly year for winter storm-related insured catastrophe losses. Should the trend for freezing weather and extreme snowfall seen this year continue, the losses from winter storms are likely to increasingly become an issue for insurers as well as feature as a covered peril in catastrophe bonds and other collateralized reinsurance covers.

As we said previously here, there is always the potential for some erosion of the aggregate layer protection on some exposed cat bonds, if the specific declared winter storm catastrophe events resulted in sufficient losses to breach retention or deductibles and began to eat into aggregate loss totals.

But again, it’s important to stress that despite the ongoing winter storms in the U.S., at current estimated levels of losses it’s highly unlikely that any exposed catastrophe bonds would be troubled. At more risk could be reinsurance programs which may have collateralized capacity from ILS funds within them. That is more likely to trouble ILS investors than the high attachment, remote loss scenario of most of the exposed cat bonds.