Swiss Re Insurance-Linked Fund Management

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Skyline Re cat bond deductible erosion continues, but pace slows


Erosion of the deductible layer sitting beneath the $180 million Skyline Re Ltd. (Series 2017-1) catastrophe bond has slowed in the second-quarter of 2017, with the $106 million of qualifying losses reported after the first-quarter only rising to $119 million by the middle of the year.

The Skyline Re 2017-1 catastrophe bond was sponsored by The Cincinnati Insurance Companies (Cincinnati) and the insurer reports its catastrophe losses that qualify under the terms of the cat bond transaction in its quarterly results.

The second-quarter has seen the figure rise, further denting the retention and buffering layer sitting beneath the Skyline Re trigger, but the impact of severe convective storms has clearly been less severe during Q2 compared to the start of the year.

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

After Q1 2017 the aggregated losses qualifying under the terms of the cat bond had reached $106 million, which with a trigger set at an aggregate attachment point of $190 million, after an $8 million per event deductible, the Skyline Re cat bond began to look at risk.

However the second-quarter has been kinder and now Cincinnati reports its aggregated losses have reached $119 million.

Cincinnati explained the deductible erosion for the Skyline Re cat bond; “For our collateralized reinsurance arrangement that became effective in January 2017, aggregate losses occurring from January 23, 2017, through June 30, 2017, totaled $119 million from nine occurrences. These aggregate losses reached the applicable loss deductible provision for the specific geographic locations included in the severe convective storm portion of that coverage.

“If aggregate losses, after the $8 million per occurrence deductible, exceed $190 million during an annual coverage period, we can recover the excess through funds that collateralize the catastrophe bonds.”

Aggregate catastrophe losses are running behind 2016 for the second-quarter, which has helped to lessen the erosion of the cat bond deductible in 2017.

Three separate convective storm events caused almost $100 million of the deductible erosion during the first-quarter of 2017, while second quarter events have been much less impactful to Cincinnati’s insurance and reinsurance book.

After the first-quarter the price in the secondary market for the Skyline Re Class 2 notes had fallen to as low as bids and offers around 84 to 85.

As of recent days, some broker sheets continue to have the Skyline Re Class 2 notes priced around 10% down, around 89 or 90, but there are others which have the deal priced at around 99. It will be interesting to see whether brokers price the notes down further to account for the aggregation of losses

It’s unclear whether this is because brokers feel the cat bond is relatively safe from loss, or whether they just haven’t kept up to date with the development of the deductible erosion.

So the likelihood of triggering across the remainder of the risk period for this Skyline Re 2017 cat bond has continued to increase, as the deductible has eroded further and the attachment point comes further into view.

While the pace of deductible erosion slowed considerably through the second-quarter, the fact it has now been 62% eroded and the risk of attachment risen further makes this a cat bond to watch as the rest of the year progresses.

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