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First Coast Re cat bond price bounces back post-Matthew


One of the catastrophe bonds which had traded at a reduced price due to the approach of hurricane Matthew has bounced back. The First Coast Re Ltd. (Series 2016-1) cat bond had traded as low as 62 cents on the dollar on Thursday 6th but bounced back to above par at 102 on Tuesday 11th.

The First Coast Re cat bond was actually not one of those highlighted as particularly at risk last week, as hurricane Matthew approached. It was rated as having a chance of becoming riskier though by certain risk models, we understand.

Sponsored by Security First Insurance Company, a Florida specialist property underwriter, and with an attachment probability of just 1.2% it doesn’t look so risky on the surface, but the underlying reinsurance structure means that any meaningful loss could increase the risk of these cat bond notes.

The First Coast Re notes feature a top and drop structure, so as any catastrophe losses affect and erode Security First’s reinsurance cover, the cat bond attachment point would drop down to replace eroded reinsurance layers.

So an investor may have felt that there was a chance of the attachment probability of the notes increasing due to hurricane Matthew’s impact on Security First’s reinsurance tower, and so felt a sale was a wise move at the time.

The single tranche of First Coast Re notes traded at 102 cents on the dollar on the 29th September, before hurricane Matthew posed any threat of landfall and was still a tropical storm.

Then, on the 6th October, which was the point where the outlook for Florida worsened considerably, the First Coast Re notes traded at 62 cents on the dollar, likely as an ILS investor sought to exit its position in the cat bond.

On the 7th, just a day later, the notes then traded again at 89 cents on the dollar, signalling that confidence had increased that Matthew may stay offshore or that an investor was willing to take on the risk in order to make a profit on the bond.

The buyer in both of those trades seemingly proved to be right, as First Coast Re notes traded again on the 11th October at 102, implying a full recovery and a tidy profit for those willing to take the risk to buy the cat bond at distressed levels while a hurricane was still a threat.

Meanwhile the three tranches of the Laetere Re Ltd. (Series 2016-1) catastrophe bond, sponsored by and providing reinsurance for United Property & Casualty Insurance, plus its subsidiaries Family Security Insurance and Interboro Insurance, which have been considered the most at risk by many, have not traded again since their pre-Matthew discounted trades.

The latest trades for the three tranches of notes remain at 85.25 for the Class A, 92.25 for Class B and a truly distressed 34.5 for Class C, which are the riskiest of the three sets of notes. The fact these haven’t traded again does suggest that they are not yet considered completely risk free from Matthew losses.

The data we’re using is from FINRA’s Trace system and this does not capture every global trade of cat bonds, only those registered in the U.S., so it is possible that other trading has occurred.

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Read some of our previous articles on the impact of hurricane Matthew:

50% of mid-estimate $5bn Matthew loss to fall to reinsurance: JPM.

AIR puts hurricane Matthew insured loss at up to $8.8bn.

FedNat to call on reinsurance for hurricane Matthew, HCI to retain.

KCC puts hurricane Matthew insured losses at $7 billion.

Heritage puts Matthew losses below $100m, Citrus Re cat bonds safe.

Matthew losses to largely fall within catastrophe budgets: Peel Hunt.

Laetere Re & First Coast Re cat bonds trade down on Matthew.

Cat bond index in biggest drop since 2012 on hurricane Matthew.

Early Hurricane Matthew insured loss estimates suggest up to $6bn.

ILS investors to share “material portion” of Matthew loss: Dubinsky.

Hurricane Matthew a test for re/insurers, ILS: Rating agencies, analysts.

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