Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Combine Re cat bond investors will avoid Sandy principal losses: Moody’s


One week ago, rating agency Moody’s announced that hurricane Sandy would qualify as a covered event for the Combine Re Ltd. (Series 2012-1) catastrophe bond. At the time Moody’s said that the estimated range of insurance industry losses would see Sandy qualify as an aggregate event under the terms of the cat bond, but that it likely wouldn’t cause a loss. Now an official loss estimate from a sponsor of the deal has been published and it shows that principal losses will almost certainly not occur.

Moody’s have updated on the fate of Combine Re saying that given the current loss estimate from one of the sponsors, COUNTRY Mutual Insurance Company, the notes issued under this cat bond and their investors are safe from principal losses. COUNTRY Mutual published an initial Loss Occurrence Report on 7th November 2012, which puts their preliminary estimate at $40 million as the ultimate net loss that they will suffer as a result of hurricane Sandy. Moody’s notes that this estimate could rise a little, as the extent of losses becomes clearer, but the magnitude of this estimate puts the Class B notes in a position where they can be considered safe from this storm.

Moody’s says that there are a number of factors which will help to keep Combine Re noteholders safe from losses. COUNTRY has little property and casualty exposure in the affected states, their market share in the northeastern coastal states amounts to less than 0.2% of direct premiums written in 2011, and the fact that a large portion of the losses stemming from Sandy are from flooding and business interruptions, which residential policies that COUNTRY provides do not cover.

The qualifying losses from Sandy will add to the aggregate total of losses under Combine Re from three previous qualifying events, note Moody’s. This will further erode the first-loss layer of protection to noteholders of Combine Re, which is a credit negative relative to before the storm. However, the low ultimate net loss estimate from Sandy will have little, if any, adverse effect on the credit quality of the Class A notes, and only slightly more on that of the Class B.

Three previous catastrophe events have already eroded some of Combine Re’s aggregate protection layer under the COUNTRY Mutual Insurance Company book of business. Tornado and severe thunderstorm losses and also hurricane Isaac have between them eroded the attachment point down to $189.7m (from $300m). Now it looks like we can expect that to come down a further $40m+, meaning that it would only take an event causing around $140m to $150m of ultimate net losses to COUNTRY’s book of business for investors to begin losing principal.

Moody’s notes that the current risk period ends on the 31st December and at that point the aggregate qualifying losses are reset back to the initial attachment point. This means that winter storms are now the main threat to this cat bonds investors. When the aggregate ultimate net losses get reset to zero in January Moody’s says that will be a credit positive for the cat bond, particularly the Class B notes.

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