Cincinnati’s thunderstorm losses to erode Skyline Re cat bond buffer

Catastrophe losses suffered by primary insurer The Cincinnati Insurance Companies (Cincinnati) during the first-quarter of 2017 have now reached approximately $106 million (pretax), according to the insurer, which will have eroded some of the buffering layers and retention beneath its $180 million Skyline Re Ltd. (Series 2017-1) private cat bond.

Cincinnati reported $106 million of pretax catastrophe losses due to a number of outbreaks of severe thunderstorms and convective weather in the first-quarter of the year, which it expects to add approximately 9.2% to its combined ratio for the quarter.

The insurers most recent private cat bond issue, the $180 million Skyline Re 2017-1 which it sponsored in January, provides it with $80 million of aggregate severe or convective thunderstorm collateralized reinsurance protection through a dual-section Class 2 tranche of notes.

With the 2017 convective storm season having seen numerous outbreaks, with damage from large hail, tornadoes and strong winds, its only natural to expect Cincinnati to have suffered losses due to the aggressive start to the year for severe storm losses. It now appears that the losses the insurer has suffered will have removed some of the protection buffer that sits beneath its private cat bond reinsurance cover, effectively increasing the risk to investors through the rest of the storm season.

The $80 million Class 2 tranche of the Skyline Re cat bond, that provides the severe convective storm coverage, features an aggregate attachment point at $190 million of losses to Cincinnati, but with a $8 million per event deductible that also needs to be factored in.

Cincinnati said that of the $106 million of severe storm losses suffered so far, around $100 million comes from three separate events that occurred between February 28th and March 22nd 2017, in Midwest or Southern states.

Just over half of the losses suffered were from Cincinnati’s commercial lines insurance book, with the remainder affecting its personal lines book.

It’s hard to forecast the precise impact to the aggregate retention that sits beneath the Skyline Re 2017-1 catastrophe bond, as we do not know the individual storm loss totals or the exact number of storm outbreaks included. However it seems likely that a decent chunk of the $190 million layer sitting beneath the Skyline Re Class 2 notes attachment point will have been eroded during Q1 2017.

With severe thunderstorm outbreaks having continued through the start of the second-quarter it is likely that Cincinnati will face further erosion of this buffer beneath the private cat bond investors across the rest of the season. Which of course is exactly the way the coverage has been designed and why investors in these notes receive a coupon of 12% for holding this risk for the insurer.

So, effectively the attachment point for the Class 2 Skyline Re 2017-1 cat bond notes will likely have been reduced somewhat, for the severe thunderstorm section of coverage, as the catastrophe losses aggregate upwards for the insurer.

It will be interesting to see whether there is any change to the cat bond’s pricing in the secondary market as a result.

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