The catastrophe bonds with bid/offer price movements after Sandy

by Artemis on November 1, 2012

As our readers will be aware there have been some movements in catastrophe bond bid and offer prices both as hurricane Sandy approached the U.S. coastline on Friday and so far this week. Trading was relatively light to begin with, according to various sources, as bid and offers were rarely close enough to find a match. Some trading ensued though and we now have a list of which cat bonds have seen declines in bid and offer prices, so which are most exposed to Sandy and accompanying mark-to-market losses.

The decline in bid and offer prices for these cat bonds reflect a level of nervousness among investors and traders that these are the most likely to be impacted by hurricane Sandy. A number of bonds stand out as having the largest movement in pricing since last Friday. It should be noted that none of these movements guarantee any losses will occur, rather they reflect investors and traders nervousness around holding the notes and appetite to sell at a slightly lower price or to buy at a reduced price (as some will see a speculative opportunity). It should be noted that some of the notes with smaller declines are likely not at risk but are suffering from mark-to-market losses spilling over from the occurrence of a very large catastrophe event. It’s also worth noting that even those with larger declines are not pricing very far below par yet.

Those familiar with the cat bond market will be aware that there is no single reference point for prices on these bonds, so we haven’t included an actual price, this can differ from broking desk to broking desk. We’ve just given a flavour of the declines we’ve seen and it is clearly the aggregate bonds with the biggest declines that are most at risk from qualifying aggregate loss increases, not necessarily meaning they face a principal loss but they could become technically more risky. Some of these declines will be very quickly recovered once a bond is seen to be safe from impact by Sandy.

The biggest decline we’ve seen has affected the Swiss Re sponsored Vega Capital Ltd. (Series 2010-I) cat bond, specifically the Class D notes which covers North Atlantic hurricanes on an industry loss basis among its multi-peril, aggregate exposure. This cat bond suffered a reserve account loss after the Tohoku earthquake in March 2011 so it may be more exposed for that reason. The decline in bid and offer prices for this tranche of notes has been around 6 or 7 points. The Class C notes from this deal have also declined in price but only slightly, by just over 1 point, suggesting they are considered safer.

The cat bond deal which has seen the second largest decline in bid and offer prices is Chubb’s East Lane Re V Ltd. (Series 2012-1). This is an indemnity trigger deal covering U.S. hurricanes and severe thunderstorms. Given the size of Chubb’s book of business and exposure in the northeast it had to be a candidate for concern. The Class A tranche has dropped around 4 points and the Class B notes around 5 points.

With Chubb again, their East Lane Re IV Ltd. (Series 2011-1) has seen two tranches of notes decline in bid/offer amounts. This is a multi-peril deal covering the northeast and again uses an indemnity, per-occurrence trigger. The Class B tranche of notes has declined around 3 points while the Class A has declined just over 1 point. The Class B tranche has a lower indemnity trigger at $2.45 billion of loss to Chubb which explains why it has declined more than the Class A.

Liberty Mutual is another insurer with significant exposure in the affected regions. It’s Mystic Re III Ltd. (Series 2012-1) Class A and B notes have both dropped by around 3 points, making this one of the deals with a larger decrease. Both are indemnity triggered on a per-occurrence basis, and the Class B declined slightly more than Class A reflecting that they have a lower indemnity attachment point so trigger first.

Travelers is another insurer with a lot of exposure in the northeast and its Longpoint cat bonds have seen some drops in prices. The most recent Long Point Re III Ltd. (Series 2012-1) has seen a slight decline of about 1 point on its single tranche of notes covering northeast hurricane risks, this is an indemnity cat bond covering losses to Travelers above $2 billion. Longpoint Re II Ltd. again covers east coast hurricanes and both of its tranches of notes have seen a price decline but less than the newer issue, perhaps because this one uses an industry loss index trigger.

Also from Swiss Re, the Successor X Ltd. (Series 2012-1) Class V-D3 notes, which cover U.S. hurricanes on an industry loss and per-occurrence basis have dropped slightly. Similarly the Successor X Ltd. (Series 2011-3) Class V-F4 notes have dropped a little as well, these again provide U.S. hurricane cover on an industry loss basis.

Both tranches of Johnston Re Ltd. (Series 2011-1) and both tranches of Johnston Re Ltd. (which cover the North Carolina Joint Underwriters Assn. (NCJUA) and the North Carolina Insurance Underwriters Assn. (NCIUA)) have declined uniformly around 2 points on both bids and offers. This will likely be recouped as they only cover North Carolina hurricanes and that state escaped the worst of Sandy, so these are likely just mark-to-market type impacts.

The Shore Re Ltd. cat bond which covers the Massachusetts Property Insurance Underwriting Association members via reinsurer Munich Re has seen a drop of around 2 points in bid and offer prices. However, given that Massachusetts was not the hardest hit by Sandy we don’t expect this to be threatened too badly.

Swiss Re’s Combine Re Ltd. (Series 2012-1) which ultimately covers losses of two reinsureds, Country Mutual Insurance Company and the North Carolina Farm Bureau’s mutual insurance arm, has declined about 2 points on just the Class C tranche of notes which are the riskier tranche with the higher attachment probability.

Allianz’s Blue Fin Ltd. (Series 3) and Blue Fin Ltd. (Series 4) saw small declines in pricing. The Series 2 Class B notes declined the most, but these are aggregate notes, which the Series 3 Class A notes are per-occurrence. Interestingly the Series 3 uses a modelled loss trigger so it should become clear more quickly whether this has been impacted. We suspect not as the price drop was quite small. The Series 4 notes are also aggregate and use a modelled loss trigger. They declined the least of the three Allianz tranches.

Chartis cat bonds Lodestone Re Ltd. (Series 2010-1) and Lodestone Re Ltd. (Series 2010-2) have seen declines. Both tranches of the Series 2010-1 have declined slightly while only the Class A1 of the 2010-2 declined. The Class A 2 of the 2010-2 issuance have a much higher attachment point so clearly haven’t concerned investors.

Another Swiss Re tranche of notes from Successor X Series 5, the AA3 Class of notes, have seen very small declines.

Finally a number of USAA sponsored cat bond tranches have seen declines in pricing. Specifically the Residential Reinsurance 2010 Ltd. Class 4 unrated tranche of notes has declined about 3 points. This tranche is an aggregate structure and so considered the most risky of this deal. Similarly the Residential Reinsurance 2011 Ltd. (Series 2011-1) Class 5 tranche which are again aggregate have declined by just over 2 points. Finally from USAA, the Residential Reinsurance 2012 Ltd. (Series 2012-1) Class 5 and 7 notes, which are both aggregate tranches, have declined by about 1.6 and 0.4 points respectively. Regular readers will be aware that the Residential Re aggregate tranches have already faced some qualifying losses this year, hence it is hard to know how much more risky these have become until proper loss estimates comes out.

So for cat bonds it is the aggregate tranches of notes that comes across as most at risk from Sandy, although some per-occurrence tranches have dropped where a sponsor has significant exposure in the region. There are also ILWs and private cat bond transactions to consider and we understand that a few are at risk from a $10 billion industry loss. It seems likely that the worst impact to exposed ILS funds will generally be a loss of October performance from a combination of mark-to-market losses and perhaps some impact to an aggregate tranche or two. For private ILS structures the loss could be a little more meaningful depending on how high the industry loss estimate goes and how much exposure there is to the region at a level beneath the evantual Sandy insurance industry loss.

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