Swiss Re Insurance-Linked Fund Management

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Hurricane Isaac is a qualifying event for Combine Re catastrophe bond: Moody’s


It transpires that the losses caused by hurricane Isaac have had an impact on an outstanding catastrophe bond. According to rating agency Moody’s, losses from Isaac have qualified under the terms of the Combine Re Ltd. (Series 2012-1) cat bond transaction. While these losses are insufficient to cause direct principal losses, they will further erode the transactions protective reinsurance retention layer thus reducing its attachment point and making future losses of principal to investors more probable.

The Combine Re Ltd. (Series 2012-1) catastrophe bond was sponsored by Swiss Re America but provides cover for two reinsured parties, Country Mutual Insurance Company and the North Carolina Farm Bureau’s mutual insurance arm. This cat bond deal securitized $200m of multi-peril annual aggregate indemnity protection via Combine Re Ltd. The deal provides cover on an indemnity basis and is triggered by the ultimate net losses of the two reinsureds from the U.S. perils of hurricanes, earthquakes, severe thunderstorms and winter storms. Three tranches of notes were issued, but only two were rated by Moody’s. All three tranches of notes are exposed to all of the perils and geographic coverage locations. The transaction has an attachment point of $300m, beneath which a reinsurance retention layer provides protection before any of the three tranches of notes start to see losses.

Combine Re has already suffered due to tornado and severe thunderstorm losses on the Country Mutual book of business which eroded the retention layer by $110.3m from the $300m the deal started with. This left the cat bond with an effective attachment point of $189.7m, although that only affected Country Mutual’s protection because of the way the deal has been structured. As an aggregate transaction which resets next March, the attachment point would return to $300m if the accumulating losses didn’t breach the $300m mark within a year. Now, according to Moody’s the risk of that happening has increased thanks to hurricane Isaac.

Moody’s says that hurricane Isaac, which is estimated to have caused an insured loss of between $500m and $2 billion, has caused credit negative losses for investors in the Combine Re cat bond. Moody’s said that Combine Re bondholders will not sustain principal losses owing to this event, but Isaac will consume some more of the protective subordination layer of the deal, leaving investors more vulnerable to losses from future qualifying events, which is credit negative. Moody’s notes that these losses from Isaac are additional to the ones we reported in August from the tornado season.

Moody’s notes that this leaves Combine Re investors more vulnerable, saying that the first loss layer which sits below the rated tranches of notes will absorb the potential ultimate net losses for this event. This, said Moody’s, leaves the cat bond investors more vulnerable to future losses due to an effective lowering of the attachment point. Moody’s explained; “This vulnerability arises from the fact that the rated tranches in this transaction incur losses to the extent the attachment point is less than the aggregate losses on all qualifying events in a calendar year, rather the loss on each individual event.”

The landfall event of hurricane Isaac as a Category 1 hurricane on the Louisiana coastline qualified it as a covered event under Country Mutual’s underlying book of insurance business, said Moody’s.

Moody’s acknowledges that after the three tornado events qualified under the Country Mutual book of business, which we covered here, the Combine Re attachment point was effectively lowered to $189.7m for the ultimate net losses of Country Mutual Insurance. Moody’s do not discuss how much the ultimate net loss from hurricane Isaac will be to Country Mutual and so we do not at this time know how much further the attachment point has been reduced.

We assume that Moody’s will issue a further update once the loss estimate is better understood and there could be a further ratings downgrade if it is sufficiently severe. That said, as this event is only thought to have caused up to $2 billion in industry-wide insured losses, and Country Mutual Insurance is not one of the largest insurers in Louisiana, we don’t expect the impact to be great. However any further degradation of the attachment point has to be a concern for Combine Re investors with over six months left to run in this loss period.

Moodys’ also mentions that another five cat bonds which they provide ratings on and were exposed to hurricane Isaac are all safe. The five cat bonds are Globecat Ltd., EOS Wind Ltd., Vega Capital Ltd. (Series 2010-I), Successor X Ltd. (Series 2012-1), and Mythen Ltd. (Series 2012-1), all of which cover single per-occurrence events and so would only be at risk from much more severe hurricane events than Isaac.

So it seems that Combine Re’s effective risk profile has risen due to hurricane Isaac as it will now take less future losses for the cat bond to be triggered. We’ll update you when/if Moody’s release details on how big (or otherwise) the impact from Isaac has been to Combine Re and whether a further rating downgrade is applied. It’s worth reiterating though, that as Isaac was a small hurricane loss event we don’t expect the impact to Combine Re to be very large.

Given that, as we understand it, the underlying reinsurance cover for Country Mutual Insurance is for excess of $300m of losses we don’t believe the unrated, riskier tranche of Combine Re is at risk of principal losses either. If that proves to be an incorrect assumption we’ll let you know.

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