Cat bond pricing shows investor concern over Sandy and Successor X V-F4


Some of the latest pricing indications for secondary catastrophe bonds show that investors have real concerns that the final industry loss total from hurricane Sandy could be sufficiently high to trigger the Successor X Ltd. (Series 2011-3) Class V-F4 notes. The Successor notes are the last cat bond which is considered seriously at risk of facing a loss due to Sandy and the indicative price for the notes declined again after PCS released its latest industry loss estimate last week.

The Successor X V-F4 notes have always been one of the cat bonds which was considered to have the greatest chance of exposure to losses from hurricane Sandy. In November the bid price for the Successor X V-F4 notes dropped to as low as 25, according to reinsurance broker Aon Benfield. Then after PCS issued its first loss estimate at $11 billion the bid price gradually climbed upwards, reaching 75.00 by the end of 2012.

Last week PCS increased its insurance industry loss estimate for hurricane Sandy by 70% to $18.75 billion, which at the time investor sources told us was very close to the Successor X V-F4 industry loss trigger point. As a result of this, indicated pricing for the Successor notes has dropped again and bids are now being invited at levels as low as 50.00 according to some of our sources.

So the history of the Successor X V-F4 notes pricing impacts due to hurricane Sandy now looks like this:

IssuancePeril(s)TriggerBid – 19th OctBid – 16th NovBid – 31st DecBid – 25th Jan
Successor X Ltd. (Series 2011-3) Class VF-4U.S. HurricaneIndustry index98.0125.0075.0050.00

The other catastrophe bonds which had been considered exposed to Sandy have now fully recovered as far as latest pricing indications are concerned. All three of the other exposed cat bonds Long Point Re III Ltd. (Series 2012-1) Class A, East Lane Re IV Ltd. (Series 2011-1) Class B and Mystic Re III Ltd. (Series 2012-1) Class B are back at bid levels above 100.

We’ll keep you posted as Successor X V-F4’s future becomes clearer. It is by no means certain that the deal will be triggered and to determine whether it triggers the industry loss figure is transformed into an index value using risk models. It remains the cat bond which is most threatened by Sandy but it is likely that the next update from PCS will be required before anyone can say with any certainty whether it will be triggered.

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