Cincinnati’s losses get closer to Skyline Re cat bond trigger at end of Q3

Cincinnati Financial Corporation’s aggregated catastrophe and severe weather losses continued to rise through the third-quarter of 2019, with the total after deductibles now reaching reach 79% of the way to the trigger attachment point of its $180 million Skyline Re Ltd. (Series 2017-1) catastrophe bond.

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

The $180 million Skyline Re 2017-1 cat bond provides the insurer with $100 million of per-occurrence earthquake reinsurance protection, as well as $80 million of aggregate severe or convective thunderstorm collateralized reinsurance protection through its dual-section Class 2 tranche of notes.

This $80 million Class 2 tranche of notes is the one that, being annual aggregate in nature, has repeatedly been exposed each annual risk period due to the aggregate retention being eroded by severe weather losses that occurred in the United States.

The insurer has not managed to call on its reinsurance protection from the catastrophe bond thus far, as aggregated losses did not reach the trigger in 2017 or 2018, but in 2019 the rate of erosion of the aggregate retention layer has been a little faster.

By the middle of this year the insurer reported that aggregate losses across six severe storm events reached $141 million of losses after the deductible, eroding 74% of the way through the retention beneath the trigger for the Skyline Re 2017 Class 2 notes $80 million layer of reinsurance coverage.

Now, after the third-quarter, the insurer has counted eight storm events where losses were above the $8 million deductible and met the requirements for recovery, which aggregated to $150 million of losses, or now 79% of the way towards the cat bond trigger. So the rate has slowed, but losses continue to aggregate.

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

The fourth-quarter of the year typically has less convective storm activity, which means this cat bond would usually be considered safer as the year progresses to this stage.

However, with Cincinnati an active underwriter in Texas and the recent Dallas tornado outbreak falling into Q4, there is a chance that the insurer may find itself hit with a larger loss if its exposure was higher there.

Whether any loss from that tornado outbreak would be enough to take the qualifying losses closer to the trigger point is impossible to say at this stage.

As we’ve explained before, this is a great example of an aggregate catastrophe bond acting as it should do.

The structure is managing the loss activity the sponsor has suffered over the course of the year and is ready to pay out should those losses reach the point where the protection was designed to kick-in.

In each year of the term losses have mounted, but the Skyline Re cat bond has not paid out. As Cincinnati Financial’s aggregate losses have not been quite as severe over the annual risk period as the bond was designed to be activated for.

In 2019, with only just one quarter left to account for, there’s a good chance the Skyline Re cat bond makes it through to maturity unscathed, unless the Dallas tornadoes turn out to be a particularly impactful event for the insurer (or another similar outbreak occurs).