Cat bonds drop 16% on hurricane Irma, prices discounted heavily

Hurricane Irma’s threat to Florida saw the catastrophe bond market drop 16% yesterday, their biggest single days decline on record, as the ILS market and its investors recognised the severe threat the major hurricane poses to their investments.

According to Bloomberg data the Swiss Re Cat Bond Price Return index dropped by a huge 16% on Friday, the steepest decline in the history of the index which tracks the value of the catastrophe bond market.

Catastrophe bond index drops on hurricane Irma - Source Anthony B. Sanders

It’s a very sharp decline reflecting the cat bond investment space acknowledging the threat hurricane Irma poses and the fact that insurance and reinsurance market losses will be considerable.

Yesterday the forecast looked much worse, with the track aiming for some of the most densely concentrated insured values in the United States. This morning (Saturday 9th Sept) the track has shifted west a little further, so whether a 16% haircut to the cat bond market is accurate is impossible to say.

Secondary pricing sheets show some catastrophe bonds marked down considerably, particularly some exposed to Florida primary insurance firms, some retrocessional bonds for reinsurance firms and a number of private cat bonds.

For example, the Atlas IX Capital Limited (Series 2015-1) and Atlas IX Capital DAC (Series 2016-1) retro catastrophe bonds from French reinsurance firm SCOR have both been marked down to 75 on some broker pricing sheets.

The Blue Halo Re Ltd. (Series 2016-1) Class A notes are down below 70 and the Class B notes below 50, while the Blue Halo Re Ltd. (Series 2016-2) Class C are around 70.

The Class C tranche of Safepoint’s Manatee Re Ltd. (Series 2016-1) cat bond are down at 20 to 30 on some sheets.

The riskier two tranches of the Oak Leaf Re Ltd. (Series 2017-1) cat bond, sponsored by Southern Oak Insurance Company, are down at 10 to 15 and 50.

The Casablanca Re Ltd. (Series 2017-1) Class C notes took an even bigger haircut, with brokers pricing them from 20 to 25.

Some tranches of Citrus Re cat bonds, sponsored by insurer Heritage, are priced as low as 35 (for the Citrus Re Ltd. (Series 2016-1) Class E notes) and 40 (for the Citrus Re Ltd. (Series 2015-1) Class C).

Other notables are some Galilei Re tranches, sponsored by XL, priced down in the 40’s and 50’s, the Integrity Re Ltd. (Series 2017-1) tranches all discounted by 25%, some Kilimanjaro Re tranches (sponsored by Everest Re) priced down around the 60’s to 70’s.

Many other bonds are discounted by just a few points, reflecting the market taking a haircut as a major event unfolds.

At this stage these are all just mark-to-market reductions and whatever the outcome from hurricane Irma’s impact on Florida, many of these would be expected to recover some of their value at least by Monday.

Some catastrophe bond funds may have to mark down their NAV’s based on the pricing sheets, but again some recovery is likely as it does look like the market has priced in a worst case scenario at this stage.

Investment managers at Plenum Investments in Zurich said that the scenario they foresaw for Irma yesterday could have resulted in a loss of approximately 13% of their cat bond funds NAV (+/-5% of NAV), which aligns closely with the 16% cat bond market decline.

The scenario Plenum Investments looked at yesterday, of the strongest winds tracking over Miami as the storm ran up the spine of Florida, had a potential loss attached of $106 billion. With hurricane Irma’s shift further west this morning, this may now be too extreme.

Plenum said; “We expect a massive reduction of the secondary market prices for all exposed bonds, which will be reflected in the next NAV,” which has clearly occurred.

However they highlighted that; “The range of uncertainties is still very broad and, in principle, all tracks within the cone of uncertainty are still possible.”

All now rests on the impact of hurricane Irma and where precisely it strikes southern Florida, as that will drive the losses  to the insurance and reinsurance industry that could trigger and default catastrophe bonds.

The market will now just have to wait and, like the residents of Florida, hope for the best.

Also read:

– Hurricane Irma track in westward shift, remains on course for Florida.

– Stone Ridge reinsurance and ILS fund drops 8%+ on Irma threat.

– Interest in back-up reinsurance rises on Irma, live cat still quiet (so far).

– Billions of catastrophe bonds at risk from Hurricane Irma.

– CCRIF to pay $15.6m on Hurricane Irma impact to Leeward Islands.

– Hurricane Irma track aims at Miami, a $131bn realistic disaster scenario.

– Blue Capital halts ILS fund buy-backs as hurricane Irma approaches.

– Cat bond trading slight on Irma, Kilimanjaro II Re trades down.

– Hurricane Harvey re/insurance industry loss over $10bn: AIR.

– Irma & Harvey losses combined may still just be an earnings event: Morgan Stanley.

– Citrus Re 2017 cat bond notes trade down 50% on hurricane Irma threat.

– Hurricane Irma live cat activity focused on $40bn+ loss, pricing uncertain.

– Hurricane Irma landfall in Florida would hit reinsurers hard: KBW.

– Hurricane Irma a potential U.S. (Florida) threat this weekend.