Pandemic cat bond secondary price reacts as coronavirus cases rise

The secondary market indicative price for one tranche of the World Bank’s pandemic catastrophe bond transaction has now responded to the rise in cases from the novel coronavirus outbreak.

As we explained previously, the novel coronavirus (2019-nCoV or Covid-19) outbreak that began in the city of Wuhan in Hubei province China poses a potential threat to the World Bank’s $320 million IBRD CAR 111-112 catastrophe bond that provides a source of insurance or reinsurance capital to back the Pandemic Emergency Financing Facility (PEF).

The coronavirus outbreak could become an eligible event under the terms of the World Bank’s pandemic catastrophe bond notes if the outbreak reaches pandemic levels and meets certain pre-defined criteria in terms of officially confirmed cases, fatalities and international spread.

As of the beginning of February, the outstanding notes of the World Bank’s pandemic catastrophe bond had not really shown any response to the coronavirus outbreak.

But the latest secondary market bid indication data from broker-dealer pricing sheets now shows that the price has reacted to the escalating coronavirus situation.

As of today, February 17th, there are over 70,600 cases of the coronavirus in China and deaths have risen to almost 1,800, according to some sources, while the WHO’s latest situation report from the 16th cites 51,857 laboratory confirmed cases globally and 1,669 deaths.

Differences in reporting sources aside, the number of cases has risen significantly over the last fortnight or more and this has now had a clear effect on the secondary market pricing of the Class B, more risky tranche of notes from the World Bank’s pandemic catastrophe bond.

In our previous article we explained how the pandemic cat bond notes and their investors provide the necessary reinsurance capital to back the so-called Insurance Window component of the Pandemic Emergency Financing Facility (PEF).

Now, fresh data shared by Morton Lane, President of consultancy Lane Financial LLC, shows a clear dip in secondary market bid quotes for the pandemic catastrophe bond notes.

The chart shows how these notes first reacted to the threat of a triggering event due to the Ebola outbreak in the Congo last year, before then recovering somewhat as the likelihood of a triggering became more remote.

Now, in the last few weeks, the price indications have dipped again on the back of the rising coronavirus case numbers it seems, as the ILS market digests the fact that the risk of triggering is elevated somewhat by that outbreak.

Lane’s data, seen below, shows how the dip in average bid-side quotes on the Class B tranche of the IBRD CAR 111-112 catastrophe bond coincide with rising case numbers of the coronavirus (top and bottom charts below).

The average bid has dropped to around 45 cents on the dollar for the tranche, on the broker sheets Lane Financial has aggregated this data from.

It should be noted that not every broker is showing this same dip in pricing and some sheets continue to price the Class B tranche at closer to 70 cents on the dollar, with very little change in recent weeks.

There remain numerous factors at play in the potential for a triggering of the pandemic cat bond, which is designed to provide reinsurance coverage for regional and global pandemic events that could threaten the developing countries protected under the World Bank’s Pandemic Emergency Financing Facility (PEF).

Requiring deaths overseas to number at least 20 in at least one country, as well as the spread of the pandemic at a certain rate, there remains some way to go for the current outbreak to cause any loss of principal to investors.

In order for the noteholders to face any loss of principal the coronavirus outbreak would need to reach a certain level of severity, in terms of the duration of the outbreak, the number of confirmed cases and deaths reported, the virus’ spread geographically with deaths experienced abroad and also a growth rate factor in terms of how quickly the outbreak is spreading. More details on the trigger in our previous article here.