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Risk of Skyline Re cat bond loss reflected in broker pricing


After primary insurer The Cincinnati Insurance Companies (Cincinnati) reported Q1 2017 catastrophe losses of around $106 million (pre-tax), which will have eroded some of the buffering layers and retention beneath its $180 million Skyline Re Ltd. (Series 2017-1) catastrophe bond, broker pricing sheets are now reflecting an increased risk of loss for the bond.

As we reported last week, the $106 million of pre-tax catastrophe losses came from a number of outbreaks of severe thunderstorms and convective weather in the first-quarter of the year, adding approximately 9.2% to Cincinnati’s combined ratio.

The $180 million Skyline Re 2017-1 provides Cincinnati with $80 million of aggregate severe or convective thunderstorm collateralized reinsurance protection through a dual-section Class 2 tranche of notes.

These losses will have removed some of the protection buffer that sits beneath the Skyline Re 2017 private cat bond reinsurance cover, effectively increasing the risk to investors through the rest of the storm season.

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

It now appears that brokers are beginning to factor in an increased risk of loss to these notes, as the aggregating severe thunderstorm losses are eroding the protection beneath them and effectively raising the likelihood of attachment over the rest of the risk period.

One broker pricing sheet has the $80 million tranche priced for bids and offers around 84 to 85, we understand from sources, which would suggest a current market perception that there could be a risk of a marginal loss to the notes.

It will be interesting to see whether future loss reports related to the Skyline Re cat bond show any worsening of the total claims qualifying under the reinsurance coverage, as with the U.S.’s severe convective weather season off to a brisk and damaging start so far this year there is every chance the erosion of the buffer beneath the cat bond has already been worsened through April so far.

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