Cincinnati’s Skyline Re cat bond buffer eroded by convective storms in Q1

The privately placed $180 million Skyline Re Ltd. (Series 2017-1) catastrophe bond is once again experiencing a rising risk profile, as severe convective storm losses from the first-quarter of 2018 have eroded some of the aggregate buffering layers and retention sitting beneath the cat bond.

The Skyline Re 2017 cat bond’s sponsor is The Cincinnati Insurance Company, part of the Cincinnati Financial Corporation which yesterday revealed its first-quarter 2018 results and explained that aggregated convective storm losses were beginning to eat their way through the buffer beneath the catastrophe bonds trigger.

Cincinnati Financial said that some of the convective storm losses were applicable to the deductible provisions under the collateralized reinsurance protection that is provided by the Skyline Re cat bond.

The insurer explained that under the terms of the Skyline Re 2017-1 cat bond, the collateralized reinsurance would allow the firm to make a recovery from the investors if its aggregate losses, after an $8 million per-occurrence deductible is applied, exceed $190 million during an annual risk period.

During the first-quarter of 2018, aggregate losses from three severe convective storm events qualified under the terms of the cat bond and their losses surpassed the aggregate reinsurance deductible, and so eroded the layer beneath the cat bond trigger somewhat, effectively raising the risk of the trigger being reached later in the current risk period.

The $180 million Skyline Re 2017-1 cat bond provides Cincinnati Financial with $80 million of aggregate severe or convective thunderstorm collateralized reinsurance protection, through a dual-section Class 2 tranche of notes. The attachment point for the Class 2 convective storm section of reinsurance coverage is the $190m of losses.

The three qualifying convective storm events in Q1 of 2018 have amounted to an erosion of $23 million of the trigger, after the per-occurrence deductible is taken into consideration, Cincinnati Financial said.

The U.S. severe convective storm season has got off to a relatively slow start in 2018, but forecasters say that this is not expected to last and that the jet stream which has pushed the typical Gulf humidity further east so far this year, is set to revert to more normal conditions, increasing the chances of more severe thunderstorm formation over the coming weeks.

Last year, the Skyline Re cat bond saw its deductible eroded by over 60% by the middle of the year, but survived as convective storm activity lessened. It will be interesting to see how convective weather activity impacts the bond through the second quarter of 2018.

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