Catastrophe bond trading in the secondary market has remained slight on the approach of major Hurricane Irma, with the market seemingly holding its breath to see which way and when the storm turns northwards and if Florida can avoid a landfall.
Given the continued uncertainty in the eventual landfall location and impacts that Hurricane Irma may result in, the catastrophe bond market has not sprung into life as some may have presumed it would.
Catastrophe bonds are a major form of reinsurance capacity covering the Florida and U.S. east coast’s hurricane exposure and so there is some nervousness related to Irma’s eventual path.
In fact trading has been relatively light, with so far only three specific names seemingly trading down on a threat from Irma, the latest to do so being a slug of the Kilimanjaro II Re Ltd. (Series 2017-1) Class 1 notes.
As we revealed the other day, there was a $1 million trade in Heritage’s Citrus Re Ltd. (Series 2017-1) cat bond notes on Tuesday 5th September at a price of 50, down from the previous secondary trade price (according to Trace) of 100.55.
However, that specific trade should be seen as an outlier, as it’s clearly just one investor clearing out exposure to Irma at any cost and not a signal of the market’s expectation of losses. That specific bond is far less exposed to a possible Irma landfall than many other outstanding cat bonds and so seems not to suggest any specific market forecasts of impending losses.
The second cat bond to trade was a chunk of the Galilei Re Ltd. (Series 2016-1) Class E-1 notes, sponsored by XL, which traded at 95 on Tuesday, having previously been priced at 100 or greater.
Again, this is not the cat bond at greatest risk of a hurricane Irma loss by any means, so seems another case of an investor wanting to get out of a position.
The latest trade features reinsurance firm Everest Re’s Kilimanjaro II Re Ltd. (Series 2017-1) Class 1 notes which traded at 94 yesterday, Wednesday 6th September.
These Kilimanjaro II Re notes had previously been priced at 102.7, so this is clearly another trade where cat bond notes have been sold at a discount due to hurricane Irma’s approach to Florida.
But again, this is still not an indication of the cat bond or ILS market’s overall sentiment and expectation of loss, as this is not the riskiest tranche of catastrophe bond notes sponsored by Everest Re which have exposure to Florida and U.S. coastal hurricane risks.
In fact these are the lowest risk tranche of Kilimanjaro II Re Ltd. cat bond notes sponsored by Everest Re and lower risk than two of its other tranches issued under Kilimanjaro Re Ltd.
One point that is worth noting about the Kilimanjaro II Re cat bond notes is that they are an aggregate cover and also include coverage for Puerto Rico named storms.
As hurricane Irma came close to a direct hit on Puerto Rico, an investor may have decided it was worth offloading these notes in case the aggregated losses from Puerto Rico and Florida or the U.S. mainland heightened the risk of loss for this bond.
We understand that there have been a few other trades, but only at very slightly discounted rates, but generally the cat bond secondary market has been quiet as the uncertainty over hurricane Irma’s eventual path and potential U.S. or Florida landfall continues.
Cat bond and ILS fund managers are not giving anything away currently, with any updates just saying they are monitoring the situation at this stage.
They have reported increased volatility in bid and offer prices on exposed cat bonds, but very little is actually being traded the cat bond managers largely say.
It may take one or two more updates to the forecast models and NHC cone for hurricane Irma before the market comes alive, should the Irma threat become more certain.