Swiss Re Insurance-Linked Fund Management

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Tornadoes to hit Combine Re cat bonds first-loss layer protection


Ratings agency Moody’s is the first to issue a credit rating update related to a catastrophe bond that is exposed to the recent tornadoes in Oklahoma, including the Moore tornado event. Moody’s said in the update that losses resulting from the catastrophic tornado that struck Moore, Oklahoma on the 20th May are credit negative for the Combine Re Ltd. (Series 2012-1) catastrophe bond.

To refresh your memories, the Combine Re cat bond, sponsored by Swiss Re America, was the first cat bond to combine reinsurance protection for two reinsured parties, which are Country Mutual Insurance Company and the North Carolina Farm Bureau’s mutual insurance arm, ultimately the beneficiaries of the cover.

The deal involved the securitization of $200m of multi-peril annual aggregate indemnity protection via the Combine Re Ltd. special purpose vehicle. Cover is on an indemnity basis and can be triggered by the ultimate net losses of the two reinsureds from the perils U.S. hurricane, U.S. earthquake, U.S. severe thunderstorm and U.S. winter storm.

Moody’s rates two of the three tranches issued by Combine Re, the third was unrated, and says that the recent tornado events in addition to previously reported losses of $20.7 million from another qualifying event in 2013 are credit negative for the deal. Moody’s expects that losses from the tornado event will reduce the first-loss layer protection that the Combine Re cat bond structure benefits from.

The Combine Re deal has strong subordination, with reinsurance and deductibles coming into play for both of the beneficiaries of the deal before losses can eat into the notes principal. Because of this strong subordination, and relatively low preliminary loss estimates, Moody’s does not expect that losses will rise to a level where the noteholders could face any loss of principal.

Moody’s is basing its assessment on the loss estimates that have so far been forthcoming, citing EQECAT’s insured property loss estimate of $2 billion to $5 billion for the tornado events of the 18th to 20th May.

Moody’s note that while this is a high loss estimate for a single tornado event, it is relatively low in terms of the level of loss required to impact the Combine Re cat bond. The benefitting parties have relatively low exposure in the area, the North Carolina Farm Bureau has no exposure in Oklahoma and Country Mutual’s market share in Oklahoma was below than 1% in 2012. That equated to under $10m of direct homeowners premiums written and limited commercial exposure as well. Moody’s says that this is not significant enough to eat through the subordination and first loss layer protection or to warrant a downgrade or watch on the notes’ ratings.

So it would seem from this announcement that Combine Re will face some erosion of the first-loss layer protection, or subordination, that the notes benefit from, but that this will likely be minimal. On the secondary market last week Combine Re bonds continued to be offered priced above par, suggesting that there has been no meaningful selling of the notes to date and that investors are not concerned.

Read about the Combine Re Ltd. (Series 2012-1) catastrophe bond in our Deal Directory.

Some of our other coverage on the recent tornado events:

Oklahoma tornado may cause catastrophe bond price movements

Credit Suisse: losses from Moore tornado under $5 billion, no ILS fund impact

Insured losses from Moore, Oklahoma tornado could surpass Joplin

LGT Insurance-Linked Strategies: No impact expected from Oklahoma tornado

CATCo: No impact from Oklahoma tornadoes if insured losses below $5 billion

Blue Capital: No material loss expected from Oklahoma tornado

EQECAT: $2Bn to $5Bn insured losses from recent tornado events, including Oklahoma

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