Jury out on illiquid cat bond market’s reaction to dual hurricanes - Debtwire

Jury out on illiquid cat bond market’s reaction to dual hurricanes

12 September 2017 - 12:00 am

The handful of catastrophe bonds that have traded this week have done so at levels far below the securities’ previous trades — which in some cases were months ago — according to data from TRACE.


In one case, a cat bond with direct exposure to Hurricane Irma rebounded this week from trades at prices equal to a 50% drop in value last week, according to Trace. The Finra pricing service reported two USD 1m trades of Citrus Re 2017-1 A’s on Monday (11 September) at 81 and 80.5 prices.


That is up from a trade at 68 for a USD 1m piece on 6 September, and prices of 50 and 50.5 for two USD 1m trades on 5 September. Prior to that, the most recent trade price was 100.55 for a bond larger than USD 1m in size on 14 August. All prior trades of Citrus 2017-1 A’s reported to TRACE were above 100 in price.


“The reason for the price rebound is that the [Hurricane Irma] landfall impact was lower than the models had been suggesting before it,” said a cat bond analyst. “Also, after landfall the damage becomes clearer day by day, so it is to be expected that we see some recovery.”


Still, trades in the low 80s represent an approximately 20% drop in value for the Citrus bonds from previous trades. Citrus 2017-1, issued by Heritage Property and Casualty Insurance Co. in March, was a USD 125m deal reinsuring risk from named storms in Florida, Georgia, South Carolina and North Carolina, according to cat bond research firm Artemis. Irma made two landfalls in Florida on Sunday before moving into Georgia.


Two other bonds with exposure to Irma have also traded down recently, and haven’t yet show signs of recovery. Two Citrus 2016-1 D’s larger than USD 1m in size traded Monday at prices of 78.5 and 78, well below the bond’s last trade prices of 105.25 and 105.35 on 15 November, according to TRACE.


Citrus 2016-1 was a USD 250m, February 2016 deal providing reinsurance protection on damage from named storms in Florida and Hawaii, according to Artemis.


And on 6 September, a Kilimanjaro 2017-1 C1 larger than USD 1m in size traded at 94, compared to two trades at 102.7 and 102.8 on 16 August. Two attempted trades at 94.1 on 6 September were cancelled, according to TRACE.


Kilimanjaro 2017-1 was a USD 950m deal issued by Everest Re in April providing reinsurance protection on named storms and earthquakes in the US, Puerto Rico and Canada, according to Artemis.


The Citrus and Kilimanjaro deals were not rated.


Alamo Re 2015-1 A’s, which have some exposure to damage from Harvey, traded four times on 25 August at prices of 97 and 97.25, according to TRACE. The trades occurred the same day Fitch detailed the deal’s exposure to Harvey. Previous trades in early August were at 101.65-101.75, and trades in June and earlier in the year were at handles of 102-103.


Alamo Re 2015-1 provides wind and storm surge protection for 14 seacoast counties in Texas, according to Fitch. However, based on damage estimates of USD 1.5bn-USD 2.6bn in the affected areas, and an attachment trigger of USD 4.2bn — which is significantly higher than losses that would flow to Alamo Re — Fitch did not see rating implications for the USD 700m deal as of a 25 August release.


The Swiss Re Cat Bond Price Return Index plummeted from around 94 on 1 September to about 79 on 8 September, according to Bloomberg data. The index is updated each Friday, and tracks the price return for all outstanding USD-denominated cat bonds.


According to S&P, Hurricane Irma alone poses risk to 13 rated cat bonds (see story, 7 September). However, according to TRACE data, most of the bonds S&P named have not traded recently, and indeed most trade very infrequently.


For instance, on 31 August, Fitch warned that claims related to Harvey could put Tradewynd Re 2014-1 into default. According to TRACE, the bond’s 3-A tranche last traded in January, at 101.3. Two other Tradewynd securities haven’t traded since June.


by John Wilen