Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

One tranche of Combine Re Ltd. catastrophe bond notes downgraded on estimated losses


The Combine Re Ltd. (Series 2012-1) catastrophe bond, which 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, has become the latest cat bond to suffer losses. According to a report from rating agency Moody’s, one tranche of cat bond notes issued by Combine Re has been accumulating losses reported in the latest estimated loss report.

To refresh your memories, this cat bond deal involved the securitization of $200m of multi-peril annual aggregate indemnity protection via Combine Re Ltd. Swiss Re hailed this as the first catastrophe bond combining the risk of two reinsured parties into a single transaction which they said marked an important innovation in better enabling primary insurers to access the catastrophe bond market. 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.

Moody’s say in their report that they have downgraded the rating on the $50m Class B notes issued by Combine Re Ltd. They have taken this action as an estimated loss report dated 9th August shows qualifying loss occurrences from a number of catastrophe events. The losses are all due to indemnity impacts suffered by Country Mutual Insurance Company, one of the two sponsors and beneficiaries of the coverage.

Based on the loss report, Country Mutual Insurance estimates that they will suffer an aggregate ultimate net loss from three catastrophe events, PCS No. 74, PCS No. 77 and PCS No. 83, totalling $110.3m. These three events correspond to severe thunderstorms that occurred on 28th-29th April, 6th-7th June and 28th June-7th July, respectively. All of these events are covered under the terms of the cat bond transaction.

The losses estimated from these three events are not sufficient to cause any loss to the Class B Combine Re notes but they will reduce the attachment point significantly, thus raising the risk of attachment for the transaction in future during the first risk period. The amount of additional losses now required to reach the attachment level has been reduced to $189.7m from its initial level of $300m for this tranche of notes. Moody’s notes that this does not affect the attachment level for North Carolina Farm Bureau losses.

Moody’s have downgraded the Class B notes from ‘Ba3’ to ‘B1’ as a result of the estimated loss report. Moody’s says that an additional ultimate net losses from Country of $10.7m or higher may result in further downgrade of the Class B notes rating. Alternatively if the current risk period ends without the aggregate ultimate net losses reaching the attachment point the rating will likely be upgraded again as the UNL totals get reset to zero for the start of each risk period.

As this is an estimated loss report from Country Mutual Insurance there is a chance that the total could rise when claims are confirmed and a final loss UNL loss total is understood. It’s unlikely that it would rise significantly enough from the three qualifying PCS catastrophe events to trouble the attachment point though. The risk period for the notes doesn’t begin again until the 23rd March though so there is a significant period of time to run before holders of these Class B notes can feel totally secure. The fact that it is severe thunderstorms which threaten this catastrophe bond will not help investors confidence in taking on thunderstorm and tornado risk, especially considering the Mariah Re losses from 2011. However it is worth remembering that no loss has yet occurred to noteholders of the Class B tranche and there it is by no means a certainty that they will suffer losses. This is another good example of a cat bond functioning as designed, providing very specific tailored cover to a sponsor.

The unrated tranche of Class C notes are more risky than these Class B notes and had a higher attachment probability suggesting that they provide the lowest layer of cover for lower UNL loss totals. As they are unrated we aren’t sure at this stage whether they have been affected by these qualifying catastrophe events, but given the structure of this cat bond there is a chance that Class C noteholders may be at risk of loss. We’ll try to confirm if we can get any information on this for you.

It has become clear that the unrated tranche of Class C notes will not be exposed to any loss as the underlying reinsurance cover for Country Mutual Insurance is for excess of $300m of losses.

We’ll update you if/when we hear any more about these qualifying losses for Combine Re Ltd. (Series 2012-1).

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