Secondary market prices have dropped for some catastrophe bonds in the wake of recent severe winter storm losses in the United States, with aggregate Residential Re cat bonds, sponsored by primary military mutual insurer USAA, the names in investor focus.
We’ve analysed some catastrophe bond broker pricing sheets and it’s clear that investor nerves are heightened over the potential for relatively significant aggregate deductible erosion for some of these capital markets securitization sourced reinsurance arrangements, perhaps even some principal loss.
Estimates for the insurance and reinsurance market loss from winter storm Uri and the related severe freezing weather events reach well into the double-digit billions, some as high as $18 billion to $20 billion.
As a result, catastrophe bond market participants have been analysing their portfolios to identify potentially exposed cat bond tranches and establish whether there is any risk of impact to them, if the winter storm insurance industry loss reaches these levels.
The winter storm losses are expected to be most concentrated in the state of Texas, where the impacts have been particularly significant and hundreds of thousands of insurance claims are set to be filed.
That has ramifications for many reinsurance programs of the major insurance carriers operating there and USAA, the most prolific sponor of catastrophe bonds, is seen, by Fitch Ratings, as having a 9.4% homeowners market share across Texas and Louisiana.
With such a large exposure to the winter storm losses in Texas and surrounding states, the cat bond market is now pricing in USAA taking a relatively significant loss, it seems, with the assumption that this could eat into some of its reinsurance arrangements, or at the least erode some of the deductibles under its aggregate layers of coverage.
From the secondary cat bond market pricing that we’ve seen, it seems cat bond fund managers and investors are anticipating erosion of aggregates, with the potential for some erosion of principal as well, for certain of USAA’s Residential Reinsurance cat bond program.
It’s important to remember that, when it comes to USAA’s aggregate cat bonds and the reinsurance layers they support, some erosion of aggregate deductibles has already been underway after other catastrophe events in recent seasons of hurricanes and wildfires.
These bonds tend to respond to numerous events throughout the year, in their deductibles being eroded which effectively makes them riskier, by reducing the remaining losses required to attach and create a loss of principal.
As a result, at this time without seeing USAA’s own estimates of ultimates, it’s hard to say how close to attachment these are, but some of the Residential Re catastrophe bonds have been marked down by just over 30% since the winter storm began on February 12th 2021.
Three tranches of USAA’s ResRe cat bonds have been marked down by more than 30% (the 2017-1 Class 11 and 13 notes and the 2019-1 Class 13 notes).
A further four tranches of ResRe aggregate cat bonds appear to have been marked down by between 25% and 30%, with another tranche marked down by 15%.
All of these markdowns have occurred since February 12th, so are presumably due to the potential impacts of the winter storm on these aggregate cat bond tranches.
Catastrophe bond fund managers and investors holding a position in these cat bond tranches will now need to mark down a number of the USAA issues significantly, given their secondary pricing has tumbled more than 30% in some cases.
There are some other aggregate cat bonds with winter storm exposure, but the majority of these have not seen any significant decline in pricing and the movements related to this event appear concentrated in the USAA sponsored cat bond names.
This will likely read-across to private collateralized reinsurance layers which provide aggregate coverage as well.
Hence, some ILS funds may also experience some valuation adjustments to certain positions as a result of the winter storm.
There are also expected to be some per-occurrence reinsurance losses, which could impact certain private ILS or collateralized positions, as well as losses that are expected to flow through quota share arrangements and any exposed sidecars.
However, the ILS market impact from the winter storm remains unclear and for most ILS fund managers we believe the event will prove only an attritional loss, although for some, if more exposed to aggregate reinsurance arrangements and quota shares of regionally concentrated carriers that experience the brunt of the winter storm losses, the impact could potentially be more significant.
We understand that some aggregate cat bonds sponsored by Allstate and Nationwide are also considered to have exposure to the winter storms, although their secondary pricing has not moved anywhere near as significantly as USAA’s bonds.