Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Distressed Caelus, Citrus, ResRe cat bonds trade at rock-bottom prices


A number of at-risk of loss catastrophe bonds have been traded at rock-bottom distressed prices, suggesting investors have sought to offload bonds they believe will face a total loss, while a buyer (perhaps a single investor) is willing to bet there could be some improvement in the outlook.

HandshakeThe catastrophe bonds in question are among the outstanding Caelus Re tranches that were sponsored by Nationwide Mutual, Citrus Re tranches sponsored by Heritage Insurance and Residential Re tranches sponsored by USAA.

The trades have all been recorded in the FINRA Trade Compliance Engine (TRACE), with some of the pricing so low as to suggest a last-ditch effort by an investor to recognise some value in the soon to become a loss catastrophe bond notes they held.

First, the Caelus Re V Ltd. (Series 2017-1) Class D tranche of notes, which have been priced down for a loss of between 90% and 100% of their $75 million of principal for some months now, after the aggregate impacts of Hurricanes Harvey & Irma, severe thunderstorms, California wildfires and winter storms.

This Class D tranche of the Caelus Re V 2017-1 cat bond saw around $750k of the notes sell at just 0.20 cents on the dollar, a clear fire sale price.

Next, the Caelus Re V Ltd. (Series 2017-1) Class B tranche of notes, which have been marked down for an 80% or more loss of principal for some months again, after the impact of the same aggregation of catastrophe losses hit Nationwide Mutual.

This Class B tranche saw around $500k of notes sell for 4.90 cents on the dollar, which is again lower than the actual secondary market sheet price for these bonds, which remain priced for a roughly 80% loss of the $150 million of principal.

Next up, the Citrus Re Ltd. (Series 2016-1) Class D-50 tranche, which is marked for a roughly 60% loss on some secondary broker pricing sheets, with hurricane Irma expected to erode the investor principal.

Around $323k of this Class D-50 Citrus Re 2016 tranche was traded at just 4.4 cents on the dollar recently, again far below where the secondary mark currently sits.

Next, another tranche of Heritage’s cat bonds, the Citrus Re Ltd. (Series 2017-1) Class A tranche of notes that is marked down again for a roughly 55% to 60% loss on broker pricing sheets, after hurricane Irma impacted the cat bond.

This tranche saw roughly $212k of its notes traded at a low price of 4.4 cents on the dollar, as before well below the current secondary mark.

Another tranche that traded was the Residential Reinsurance 2016 Limited (Series 2016-1) Class 10 from USAA, which has been priced down for an expectation of a total loss on some pricing sheets.

This tranche saw roughly around $2 million of notes trading for a rock bottom 0.2 cents on the dollar according to Trace data.

Finally, the Residential Reinsurance 2018 Limited (Series 2018-1) Class 11 tranche from USAA, which has been marked down for expectations of around a 90% loss of its $100 million of principal.

This tranche saw around $1 million of its notes trading at 4.5 cents on the dollar.

Other catastrophe bonds have also been changing hands at reduced prices in recent weeks, but these are at 5% to 10% discounts and on bonds where the potential for a loss looks less certain at this time.

All of these trades took place in the same week in April and while we cannot possibly know the precise motivations of buyer or seller, we can make some assumptions.

The seller clearly believes these notes could all go to zero, else why sell at such rock-bottom, fire sale pricing?

Given the expertise among ILS managers and managers of catastrophe bond funds, it’s unlikely any of them would have been the buyers as they would also be expecting any recovery in these notes to be very unlikely.

Hence, it seems much more likely to us that the buyer will have been the motivated party seeking out these notes and that attracted the seller to meet them on price.

Quite what motivated the buyer is uncertain, but one possible reason could be the potential for subrogation rights to make a difference, in the case of the aggregate cat bonds that were exposed to the wildfires (so the Caelus and ResRe cat bonds).

In the case of these there has been some attention shown by hedge funds and alternative investors that focus on distressed assets.

We’ve spoken with a number of these hedge fund types in recent weeks who have all been asking questions about the potential for subrogation to make a difference, or for there to be a recovery in aggregate cat bond value for other legally driven reasons.

It may be that one of these hedge fund investors has stepped up and put their money where their mouth is to buy some of these distressed positions, in the hope that a little recovery can help to deliver a positive return on their investment into the catastrophe bond market at this time.

It’s hard to think the buyers would be experienced cat bond investors running a fund, as they have investor returns to consider and so buying at such distressed pricing is hard to do, particularly after recent losses and bearing in mind trapped collateral means little in the way of free cash.

Whatever the motivations, it shows that liquidity in the catastrophe bond market remains even under severe stress conditions. Although this type of liquidity may only be available for a very short period of time and can dry up just as quickly as it appeared.


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