Cat bond market trading lights up on hurricane exposed names

There was a burst of catastrophe bond trading activity yesterday, with a number of hurricane exposed bonds trading in the secondary market, including many we haven’t seen trade since hurricanes Harvey, Irma and Maria. It was the busiest day of trading recorded in Trace since the hurricanes struck.

The secondary trading market for cat bonds has not been especially busy following recent hurricane events, with so much uncertainty over the potential for losses, but a number of cat bond transactions were traded yesterday, October 11th.

It’s possible this could have been a single investor or ILS fund manager looking to offload some risk, free up some capital or just ditch the bonds it has exposure to the hurricanes through.

Alternatively, it could be because this follows the release of an industry loss estimate for Maria from PCS, providing the first view of aggregated industry losses across the three hurricanes from the lead provider of data for industry loss triggers in U.S. property catastrophe bonds.

That said, not all the cat bonds that traded yesterday are industry loss based, but with this third estimate in hand the cat bond and ILS investment market has a clearer view of the industry exposure, which can help when trying to understand the exposure that a specific sponsor of an indemnity cat bond could face.

So whether a single investor or cat bond fund offloading its exposed positions, or trades from a variety of people, the fact is that the market is gaining an increasingly clear view of what is exposed and what isn’t, which could result in greater secondary market liquidity.

Trading yesterday were the following cat bond names which have U.S. hurricane reinsurance or retrocession exposure, along with the price they traded at yesterday and the previous trade price for each bond:

• First Coast Re Ltd. (Series 2017-1) – a Florida multi-peril bond sponsored by Security First Insurance Company. Traded at 96 yesterday, the first time it has been recorded trading below 100 on Trace.
• Integrity Re Ltd. (Series 2017-1) –  another Florida focused cat bond, this time sponsored by American Integrity Insurance Company of Florida, Inc. This bond traded at 98.15 yesterday, again the first time it has traded at below 100.
• Kilimanjaro II Re Ltd. (Series 2017-1) Class C-1 – the first aggregate retro bond, sponsored by Everest Re. Not exposed to Puerto Rico but traded at 96.5 yesterday, down from its last trade at 97.5.
• Kilimanjaro II Re Ltd. (Series 2017-2) Class A-2 – Another aggregate retro bond from Everest. Traded at 61.5 yesterday, the first time a trade has been recorded in Trace for this bond. These notes are marked down to around 60 on the majority of broker pricing sheets.
• Kilimanjaro II Re Ltd. (Series 2017-2) Class B-2 – The third tranche of aggregate retro notes from Everest Re to have traded yesterday. The notes traded at 91.5, which is again the first time they have been recorded in Trace at below par.
• Kilimanjaro II Re Ltd. (Series 2017-2) Class C-2 – The final Everest Re tranche to trade yesterday. These notes traded at 96.5, again the first time seen below 100.
• Residential Reinsurance 2017 Ltd. (Series 2017-1) Class 11 –  A cat bond from USAA providing it with annual aggregate reinsurance and covering losses from hurricanes. This tranche traded at 98.1 yesterday, the first time it has been recorded in Trace.
• Residential Reinsurance 2017 Ltd. (Series 2017-1) Class 13 – Another tranche from the USAA aggregate cat bond, which traded at 99.5 yesterday, having previously traded at above par.
• Residential Reinsurance 2017 Ltd. (Series 2017-1) Class 10 – A zero-coupon tranche from the same USAA aggregate cat bond, the riskiest of the tranches issued. Traded at 80 yesterday, the first traded recorded in Trace. These notes are marked down to 60 on some broker pricing sheets, so it could be that there are becoming viewed as a little less at risk of loss from the hurricanes.
• Riverfront Re Ltd. (Series 2017-1) Class A – Sponsored by Great American Insurance, this tranche traded at 101.25 yesterday, up slightly on the last trade. These notes are marked down around the mid-90’s by brokers, so it looks like the market is now deeming them safe.
• Riverfront Re Ltd. (Series 2017-1) Class B – The second tranche of the Great American deal, which also traded above par at 100.2, despite broker sheets having them marked in the mid-90’s.
• Torrey Pines Re Ltd. (Series 2017-1) Class C – Sponsored by Palomar Specialty, this tranche of wind exposed notes traded at 100.85, which is slightly higher than their last recorded trade and around where the brokers have this tranche marked.

A few other names which aren’t exposed to the hurricanes were also recorded as trading yesterday.

So what can we learn.

There are a few tranches of cat bond notes that seem to be viewed as a little less at risk, than they have been in recent weeks based on broker marks. There are some tranches that are still clearly considered at risk, although the risk may be lessening now the view of losses is gradually becoming clearer.

Having a clearer view of risk facing the market may just unlock trading a little more in the coming weeks, as the funds and investors digest their losses and normal trading resumes on cat bond names which are no longer considered exposed.

What’s telling though is that there has been no trading at all seen in certain bonds which are exposed to all three of the hurricanes on an aggregate basis. While the cumulative estimate of losses is currently seen as too low to trigger anything but a handful of tranches of cat bonds, the fact updates will likely see the loss estimates rise means that the notes are still considered at risk and any trading would have to be at distressed levels.