Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Successor X V-F4 catastrophe bond notes still in the doldrums over Sandy


The latest secondary market pricing indications from catastrophe bond trading desks show that the hurricane Sandy threatened Successor X Ltd. (Series 2011-3) Class V-F4 cat bond notes continue to be considered at risk by investors. Pricing indications are a good measure of investor sentiment and while the average price has risen slightly since the end of January, the future for the Successor X cat bond notes remains uncertain.

When we last looked at how pricing had progressed, bids for the Successor X V-F4 notes were reported as averaging around the 50.oo mark by our contacts. In November bids had dropped to near the 25.00 point before they rose back to 75.00 after the first PCS loss estimate of $11 billion was released, before dropping back to 50.00 after PCS upped its industry loss estimate for hurricane Sandy to by 70% to $18.75 billion.

We’ve seen a number of pricing indications from the end of last week which show that investor and ILS market sentiment on the Successor X V-F4 cat bond notes chances of default has not dramatically changed since the end of January. In fact the average across a number of trading desks published price indications shows that bids range from the 50.00 to 65.00 mark depending on the secondary trading desk you speak to, with the average around 58.00.

You can see the historical average bid pricing (across a number of secondary cat bond trading desks) since hurricane Sandy for the Successor X V-F4 notes below:

Issuance Peril(s) Trigger Bid – 19th Oct Bid – 16th Nov Bid – 31st Dec Bid – 25th Jan Bid – 15th Feb
Successor X Class V-F4 U.S. Hurricane Industry index 98.01 25.00 75.00 50.00 58.00

We’re told that an event report was published on the 25th of January by the deals calculation agent AIR Worldwide disclosing an event index value of 127.4 for hurricane Sandy. We believe this must have been based on the early PCS estimate of $11 billion, as the trigger for the Successor V-F4 notes is 226 and that is nowhere near to it. PCS updated its estimate on the 21st January to $18.75 billion so we assume that the calculation for this industry loss has not yet been completed.

Investor sources tell us that their own internal modelling shows that the $18.75 billion industry loss will come very close to the 226 index value required to trigger the Successor V-F4 cat bond notes. Perhaps the next update from PCS is being awaited so that a more clear picture of the notes fate can be given?

We’ll update you if/when we can uncover any further information on the fate of this cat bond. It’s still not certain that the notes will be triggered or that they are safe. While this uncertainty remains it is likely that the pricing will remain discounted and nothing is likely to be resolved until the next estimate from PCS is released or another event calculation report is published.

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