A number of outstanding catastrophe bonds have had their secondary market values marked down, as losses could be expected due to the impact of recent hurricanes Harvey and Irma. But the brokers do not currently seem to have a clear view of cat bond losses and prices in some cases diverge dramatically.
Considered particularly at risk are a number of per-occurrence catastrophe bonds sponsored by Florida primary insurance specialist firms, as these companies could be the ones that draw on reinsurance arrangements the most of all.
Also considered at risk are annual aggregate cat bonds that provide retrocessional coverage to reinsurance firms, with the notable markdowns being to cat bonds sponsored by XL Catlin, Everest Re and Allianz Risk Transfer, as well as some aggregate cat bond markdowns for primary giant USAA.
Notably, the very small and risky Class C tranche of the Casablanca Re Ltd. (Series 2017-1) catastrophe bond, sponsored by Florida specialist insurer Avatar Property and Casualty Insurance Company, has been marked down for bids as low as 5 by one broker on its pricing sheet.
The Casablanca Re Class C notes are marked down to the 30’s by some other brokers, but another has them nearer 65 showing the gap (perhaps lag) between pricing sheets and expectations of loss.
Being marked down for bids of 5 would suggest that this cat bond tranche is likely a total loss, but it is only $6.75 million in size so (if it is a total loss) not a huge erosion of capital for the cat bond investment market.
Perhaps next most at-risk of the per-occurrence cat bonds from Floridian primary insurers are the Manatee Re transactions sponsored by Safepoint Insurance.
The Manatee Re 2016 cat bond features the riskiest layers, with the Class C tranche in particular considered to be at risk of loss. We’re told these notes have been priced down for bids as low as 10 to 20 by some brokers, although other pricing sheets have them as high as 60, reflecting the uncertainty and gap between brokers views of the likelihood of loss. Update: We’re told the Class C Manatee Re 2016-1 notes face a loss on Irma.
Other tranches of the Safepoint cat bonds are largely deemed safe, with pricing in the 90’s generally.
The Heritage Property and Casualty Insurance Co. sponsored Citrus Re series of catastrophes bonds are also considered at risk of loss still, with the riskier tranches priced for bids down as low as 25 to 30 by some brokers.
Once again there is a significant gap in broker pricing, with others having the same tranches prices as high as the 60’s.
The Citrus Re Ltd. (Series 2016-1) Class E notes are considered the most at risk of loss, with the average bid price across a number of broker marks just 41.
The Citrus Re Ltd. (Series 2015-1) Class C notes are considered the next most at risk of Heritage’s cat bond backed reinsurance arrangements, with the average bid price across brokers around the 47 mark.
The Citrus Re Ltd. (Series 2017-2) Class B tranche are next, with the average bid price seen as 50 across the brokers we understand.
Interesting, the Citrus Re Ltd. (Series 2017-1) notes which had traded at a 50% discount as hurricane Irma approached the U.S. are now priced for bids in the mid-80’s to 90’s, reflecting the fact that the three tranches named above are all riskier.
Another per-occurrence cat bond sponsored by a primary insurer is the Integrity Re Ltd. (Series 2017-1) deal, which ultimately backs American Integrity Insurance Company of Florida, Inc. although the deal was sponsored by Hannover Re on the insurers behalf.
Some of the Integrity Re cat bonds tranches have been marked down to as low as for bids of 40, but the Class B notes which are marked down the furthest provide second and subsequent coverage only. While being the riskiest tranche these are most exposed to another hurricane striking Florida now, so aren’t facing an immediate loss.
The last per-occurrence tranche of cat bond notes that stands out as having been marked down is the Class 1 tranche of USAA’s Residential Reinsurance 2013 Ltd. (Series 2013-2) cat bond.
This tranche is one of the riskiest tranches of cat bond notes ever issued to the market, with an initial attachment probability of over 21%. However, this tranche excludes Florida so the fact it has been marked down must be due to Harvey’s impacts, or Irma’s further north. It’s currently priced down in the 60’s by one broker, we’re told.
The aggregate catastrophe bonds are either retrocessional reinsurance cat bonds, related to XL Catlin, Everest Re and Allianz Risk Transfer, as well as some aggregate cat bonds sponsored by primary insurance giant USAA.
The Blue Halo Re Ltd. (Series 2016-1) cat bond from Allianz Risk Transfer has seen its Class B tranche marked down as low 20, but on average around the low-40’s, reflecting a risk of loss due to aggregation of claims across the hurricanes we’ve seen and any future storms through the rest of the season.
The Galileo Re Ltd. (Series 2015-1) cat bond from XL is marked down in the low 40’s, on average across a number of broker pricing sheets, again reflecting the risk from the two major hurricanes we’ve seen (Harvey and Irma) as well as the heightened risk across the rest of the year.
The Class A notes of Galileo Re Ltd. (Series 2016-1), also from XL, are similarly marked down for bids in the low-40’s on average, as are the A-1 notes of the Galilei Re Ltd. (Series 2016-1) cat bond and the A-2 notes of the Galilei Re Ltd. (Series 2017-1) transaction as well. All are aggregate bonds and the A tranches are the most risky of each issuance.
Finally, the USAA aggregate cat bonds are the Residential Reinsurance 2014 Ltd. (Series 2014-1) Class 10 notes (priced for bids as low as 60) and the Residential Reinsurance 2017 Ltd. (Series 2017-1) Class 10 tranche (priced for bids as low as 45) as well, both being annual aggregate notes with high expected losses.
It remains very hard to forecast losses to the catastrophe bond market, but based on broker pricing indications the Casablanca Re cat bond from Avatar P&C Insurance and the Safepoint sponsored Manatee Re catastrophe bonds look to be deemed the most at risk of a loss on a per-occurrence basis due to hurricane Irma.
The Heritage sponsored Citrus Re cat bonds seem to be considered a little safer, or perhaps only at risk of partial losses, however we will need to see how the insurers loss estimates develop before any more certainty can be drawn from pricing.
On the aggregate cat bond side of the market, those providing retrocessional reinsurance appear most at risk, led by the Blue Halo 2016 cat bond from Allianz and the higher risk tranches of the Galileo Re series from XL Catlin.
However, for these it may take more than the aggregation of losses from just Harvey and Irma to cause a loss, with future storms likely to pose a significant threat to these cat bonds.
Given where Avatar’s Casablanca Re C notes and Safepoint’s Manatee Re 2016 C notes are priced, it appears that the brokers are preparing the market for a loss on these cat bonds. As these are not particularly large tranches they would likely pay out in full if they are triggered.
The discrepencies between broker pricing sheets are to be expected, as some broker desks have access to more information on one deal than another and also have their own views on transactions risk levels.
For trading purposes it typically works out that pricing indications for cat bonds converge and deals rarely trade at levels that another broker wouldn’t have also sold the notes at.
We’ll continue to update you as the impacts of the recent hurricanes to the catastrophe bond market become clearer.