Secondary trading activity in catastrophe bonds has remained light following the landfall of hurricane Irma, even though some broker desks accepted enquiries over the weekend. Not many positions have changed hands, but notable is the price recovery of the Citrus Re 2017 cat bond and the fact a Citrus Re 2015 and 2016 trade saw the price dipping.
Last Wednesday we reported that the Citrus Re 2017-1 catastrophe bond had led prices down as Irma approached, having traded at 50 on the Tuesday, so discounted by 50% as one investor sought to offload its Florida wind exposure.
Sponsored by Heritage Property and Casualty Insurance Co., the Citrus Re series of deals are all exposed to Florida hurricane risks and occupy positions largely atop the Heritage reinsurance program.
With Heritage having extensive Florida exposure it is one of the more exposed primary players, so as hurricane Irma was bearing down on the state it is no surprise that it would be one of the bonds that some investors might seek to trade.
That trade at 50 was a one-off though, a case of an investor just disposing of its Florida position in order to remove any exposure to Irma.
Since then the price has recovered somewhat and the Citrus Re 2017-1 cat bond traded on Wednesday 6th September at 67.5 and then traded again yesterday, Monday 11th, at a price of 80.5.
The trade on Wednesday reflected the market sentiment, as a 50% discount for this bond was too severe, especially as Heritage has other cat bonds that would trigger before it. The recovery to 80.5 yesterday reflects the lowering of cat bond fund managers and investors loss expectations, as the estimates of industry losses have reduced.
It’s possible this bond will recover even further in the coming days as the picture of losses becomes clearer.
There was also another Heritage linked secondary cat bond trade yesterday, this time in the Citrus Re Ltd. (Series 2015-1) Class A notes.
The Citrus Re 2015-1 Class A tranche of notes are less risky than the 2017-1 cat bond, but not significantly. Yesterday the Citrus Re 2015-1 Class A notes traded at 95, so only a very slight discount reflecting a little uncertainty in the loss event.
But if the 2015-1 notes were to be triggered, other Citrus Re cat bonds would pay out in full first, including the 2017-1 transaction we believe. This seems unlikely at this stage, perhaps the most risky of the Citrus Re bonds is at risk, but not the least.
Finally, a trade was seen in the Citrus Re Ltd. (Series 2016-1) Class D notes, which are a riskier layer of Heritage’s reinsurance protection. This tranche traded at 78 yesterday, reflecting the higher chance of loss with this bond.
Aside from the Citrus Re cat bonds we’re told there have been a few small trades, but that while buyers are out there at the moment sellers are few and far between.
Given the reductions in the loss estimates it’s likely cat bond fund managers and cat bond investors would rather hold onto their positions to see how things pan out over the coming days.
So liquidity is there, with people willing to buy, but at the moment not needed so much, as evidenced by the lack of trades.
But for investors that do want to offload cat bonds, such as these Citrus Re trades, it has been possible to execute trades and the pricing reflects the different levels of expected loss in the different tranches of notes.
It’s a sign of a market functioning as it should, trying to identify the probability of losses and which cat bonds are really threatened after a major catastrophe event.