In its latest quarterly report on the catastrophe bond and insurance-linked securities market reinsurance broker Aon Benfield takes a look at some of the cat bonds which were marked down due to hurricane Sandy. A selection of cat bonds faced greater mark-to-market losses than the rest due to the higher potential for loss. Despite mark-to-market losses in the secondary market and the largest re/insurance loss of the year, hurricane Sandy has not led to cat bond spread increases, the broker said.
Sandy caused U.S. hurricane cat bonds to decrease in price by 4.1% up to the 16th November while U.S. multi-peril cat bonds decreased in price by around 7.9% over the same period. They slowly recovered in price after the initial PCS estimate of $11 billion was made on the 21st November, with U.S. hurricane cat bonds finishing the year down 1.9% and U.S. multi-peril cat bonds down 3.8% with no bonds having actually faced a loss.
Aon Benfield detail the price changes it saw in the four cat bonds which have broadly been thought to have the greatest exposure to a loss from hurricane Sandy.
| Issuance | Peril(s) | Trigger | Bid – 19th Oct | Bid – 16th Nov | Bid – 31st Dec |
|---|---|---|---|---|---|
| Successor X Ltd. (Series 2011-3) Class VF-4 | U.S. Hurricane | Industry index | 98.01 | 25.00 | 75.00 |
| Long Point Re III Ltd. (Series 2012-1) Class A | Northeast U.S. Hurricane | Indemnity | 100.73 | 92.50 | 100.22 |
| East Lane Re IV Ltd. (Series 2011-1) Class B | Northeast All Natural Perils | Indemnity | 103.48 | 75.00 | 98.47 |
| Mystic Re III Ltd. (Series 2012-1) Class B | U.S. Hurricane, U.S. Earthquake | Indemnity | 107.19 | 90.00 | 99.81 |
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As you can see from the data above from Aon Benfield’s secondary ILS pricing sheets there were some significant decreases in pricing, most notably with the Successor and East Lane notes. Successor X VF-4 is the only cat bond of the four highlighted which uses an industry loss index, it also has a relatively high modelled probability of attachment. It’s clear that investors were near convinced that Successor X faced a loss in the run up to the 16th November. That confidence declined after the lower than perhaps expected PCS loss estimate came out, although judging by the 75.00 bids at the end of the year Successor is still considered to be at some risk. We’ll likely need the next PCS industry loss estimate update later this month to better understand the fate of this bond.
The other three bonds highlighted above are all indemnity cat bonds and their sponsors have reported initial loss estimates which suggest that the deals are safe. The way pricing bounced back almost to pre-Sandy levels by the end of the year is testament to this.
Encouragingly, Aon Benfield’s report says that despite Sandy causing a meaningful loss, mark-to-market to cat bonds and actual losses to both insurers and reinsurers, it has not led to spread increases in the cat bond market. This is a sign of the markets maturity that deals have continued to price at or below target levels despite the threat of cat bonds defaulting due to Sandy.
Aon Benfield note that recent post-Sandy cat bonds such as Residential Reinsurance 2012 Ltd. (Series 2012-2) upsized significantly and both tranches of notes priced below targets. Compass Re Ltd. (Series 2012-1) secured significant capacity at pre-Sandy spreads according to Aon Benfield who was the structuring agent and bookrunner for the Compass deal.
Fourth-quarter secondary market activity was more subdued than usual, Aon Benfield said, as investors had plenty of capital to put into new issuances and did not need to make as many portfolio adjustments as would have been seen in previous Q4’s. More investors were looking to buy than sell, a sign of abundant capital from new investors, apart from in some short-dated U.S. quake bonds where there were more sellers than buyers.
Combine this willingness to buy risk at low spreads, still near the record lows seen mid-year, with investors who have plenty of capital to put to work, and you can see a bright future for the market in 2013.
Aon Benfield said that as the fourth-quarter closed investors had excess capacity and were looking forward to a busy 2013. The way the market dealt with the fall-out from hurricane Sandy has been admirable and shows how the cat bond market has matured. With spreads remaining near to lows, issuing cat bonds is cheaper and this should help to bring new sponsors to the market. Now we just need the primary issuance market to get up to speed and satisfy that excess investor demand.
Read an article from last week where we discuss more of Aon Benfield’s insights on the cat bond and ILS market at year-end 2012:
– $16.5 billion catastrophe bond market at year-end 2012 a record, says Aon Benfield
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