Cincinnati Financial Corporation’s aggregated catastrophe and severe weather losses over the first-half of 2019 have been sufficiently severe to reach 74% of the way towards the trigger attachment point of its $180 million Skyline Re Ltd. (Series 2017-1) catastrophe bond.
The Skyline Re catastrophe 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 $100 million of per-occurrence earthquake reinsurance protection, as well as $80 million of aggregate severe or convective thunderstorm collateralized reinsurance protection through a dual-section Class 2 tranche of notes.
It is this $80 million Class 2 tranche of notes that has repeatedly become exposed each annual risk period due to an erosion of the aggregate retention by severe weather losses in the United States.
In 2019 the severe convective weather, of thunderstorms, tornadoes, hail and high winds, from the first-half of the year has seemingly impacted Cincinnati Financial more rapidly than in previous years this cat bond reinsurance protection has been in-force.
In 2017 the the deductible for the Class 2 notes had been 62% eroded by the mid-year point, while in 2018 it was only 30% eroded by first-half severe thunderstorm activity.
The Skyline Re cat bond was not triggered in either of those years, as typically the kind of convective thunderstorm weather the Class 2 notes are exposed to tends to be less active and severe as the year progresses.
But in 2019 the aggregate losses qualifying under the terms of the catastrophe bond are higher, which does position it in a more precarious place for the remainder of the 2019 risk period.
Cincinnati Financial said that in the first-half to June 30th 2019, six specific severe convective storm events qualified under the terms of the cat bond and in each case their losses exceeded the $8 million per-occurrence deductible that is in place.
Aggregate losses across those six storm events reached $141 million, after the deductible, which is just over 74% of the way to the $190 million attachment point for the Skyline Re 2017 Class 2 notes $80 million layer of reinsurance coverage.
The fully collateralized reinsurance Skyline Re’s Class 2 notes provide Cincinnati would allow it to make a recovery from the bonds investors if losses, after the deductible, exceeded $190 million during this last of the issuance’s annual risk periods.
This is a good example of a catastrophe bond acting as it should do, managing the loss activity the sponsor suffers and ready to pay out should those losses reach the point where the coverage was designed to kick-in.
In each year the losses have mounted but the Skyline Re cat bond has not paid out, as Cincinnati Financial’s aggregate losses have not been as severe as the bond was designed to be activated for.
In 2019, the erosion of the aggregate layer beneath the Skyline Re cat bond trigger has not yet affected the Class 2 notes pricing in the secondary market.
It will be interesting to see whether the increased aggregate qualifying losses in 2019 end up affecting the secondary value of the notes in its final risk period.