All three tranches of the Laetere Re Ltd. (Series 2016-1) catastrophe bond and the single tranche of the First Coast Re Ltd. (Series 2016-1) cat bond, traded down at lower and even distressed pricing at the back-end of last week due to hurricane Matthew’s approach.
Hurricane Matthew’s approach created significant uncertainty for insurance, reinsurance and ILS interests, as the storm looked set to cause perhaps the largest industry loss experienced for a number of years.
That resulted in mark-to-market losses for the catastrophe bond market, as evidenced by the steepest decline in the Swiss Re cat bond price index for four years. The majority of that decline was based on broker pricing of outstanding cat bonds which were considered potentially at risk, but there were a few trades made at reduced pricing levels as some investors sought to offload some of the bonds considered most exposed.
The Laetere Re Ltd. (Series 2016-1) catastrophe bond was considered one of the most at risk from hurricane Matthew’s approach. Sponsored by United Property & Casualty Insurance, plus its subsidiaries Family Security Insurance and Interboro Insurance, with particular exposure to Florida and high attachment probabilities for each tranche (of 3.08%, 7.55% and 15.12%), this bond was modelled as one of the most likely to be triggered if Matthew had followed a worst case scenario.
All three tranches of the Laetere Re note traded at reduced levels at the end of last week, as investors took an opportunity to sell some of their holdings in the cat bond at reduced levels.
The Laetere Re Class A tranche of notes, where are its least risky, an attachment probability of 3.08%, traded at 85.25 on Thursday. This cat bond had been priced at levels around 97 to 97.5 just a few days earlier.
The Laetere Re Class B tranche of notes, the medium risk tranche with an attachment probability of 7.55%, traded at 92.25 on Friday. This is just slightly below the 96 to 96.5 pricing that broker sheets offered it at in the prior week.
The Class C notes from Laetere Re are where things get really interesting though, as this being the most risky tranche with an attachment probability of 15.12% meant it traded at a truly distressed price. A $500k slice of this tranche traded on Thursday around the middle of the day at a price of 34.5.
That’s a significant decline of around 63% from the 93.5 to 94 pricing that cat bond traders offered the notes at before hurricane Matthew’s approach.
To trade the Laetere Re Class C notes at such a low level demonstrates that ILS investors were taking the threat from hurricane Matthew very seriously and had been anticipating a larger industry loss than now seems likely to unfold. Laetere Re Class C was considered the most likely cat bond to trigger in advance of the storm, based on modelled scenarios.
The First Coast Re Ltd. (Series 2016-1) catastrophe bond was not one of those highlighted as particularly at risk last week, as hurricane Matthew approached. 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 First Coast Re cat bond notes feature a top and drop structure, so as catastrophe losses affected Security First’s reinsurance coverage the cat bond attachment would drop down to replace any eroded reinsurance layers.
So an investor may have felt that there was a chance of the attachment 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 First Coast Re cat bond traded at 90 on Friday when the bond had previously been priced at over 101 on broker pricing sheets the week before, so clearly an investor considered this to be a sale worth making.
Hurricane Matthew definitely gave some ILS investors a scare, pushing them to trade out of positions they felt could be at risk of triggering, or where the risk profile could change due to the storm’s impact. At this stage and based on an insurance and reinsurance industry loss of somewhere up to or around $6 billion it does seem unlikely that any will pay out (although it’s still too early to 100% confirm that yet), although there is a chance of attachment probabilities rising due to aggregate retention erosion.
Looking at cat bond broker pricing sheets there are some other interesting anomalies, such as with the Citrus Re cat bond, one tranche of which is priced down for bids of 85 by one broker pricing sheet while others kept it at just under 100.
There are a number of other cat bonds which are priced differently across the brokers. But of course that doesn’t mean you could buy the bond at that level, as you still need to find a willing seller and now the impact of hurricane Matthew is becoming clearer it’s unlikely we’ll see too much trading based on the storm until more loss estimates emerge.
Read our previous articles on hurricane Matthew: