After seeing their prices drop significantly in the wake of the US winter storms and severe freezing weather, a number of the exposed aggregate catastrophe bond tranches have now experienced a meaningful price recovery in the latest cat bond secondary market price sheets.
As we explained last week, a number of winter storm exposed aggregate catastrophe bonds from sponsors including Allstate, Nationwide and USAA saw a significant dent in their secondary market pricing as cat bond investors tried to evaluate the potential for losses to the reinsurance layers covered.
With estimates of the US winter storm loss still ranging between $12 billion and as much as $20 billion, the potential for some principal losses, or at least erosion of aggregate deductibles, to a number of the exposed catastrophe bonds remains a real threat.
But, over the last seven days, it seems cat bond fund manager and investor confidence has been boosted somewhat, as increased data and information on the winter storm loss potential emerges, helping most of the exposed catastrophe bonds to stage a relatively meaningful, albeit partial, price recovery.
Last week, after we analysed some of the secondary market cat bond broker pricing sheets, it was clear that relatively significant aggregate deductible erosion, perhaps even some principal loss, should be expected for some of these capital markets securitization sourced reinsurance arrangements.
Secondary market prices fell by as much as 70%+ in a number of cases, while more broadly up to 30% was wiped off the value of some aggregate catastrophe bonds exposed to winter storms, as concerns of their triggering were heightened in the wake of the big freeze event.
But now, as of prices on Friday March 5th, some of the cat bond positions that saw the steepest declines in their secondary marks, have staged a strong, albeit partial recovery, suggesting greater confidence that the losses from the winter storm will not be as significant as first thought.
Across all the tranches of exposed aggregate cat bonds, on average secondary prices fell by around 40% a week ago.
But on Friday, cat bond broker pricing sheets we’ve seen suggest that at least half of those mark-to-market losses have now been recovered, in some cases much more.
It’s important to remember that many of these cat bond tranches were already marked down, some significantly, due to the erosion caused by prior catastrophe loss events.
But still, the swift dip after the storm and now the recovery, suggests initial estimates of cat bond market losses may have been hasty and that the overall erosion and perhaps principal loss will be less severe than anticipated.
One Caelus Re cat bond from Nationwide has recovered around two-thirds of its initial price decline from the winter storms, while two other tranches have recovered close to half of their markdowns.
Case in point, the risky Class B notes from the Caelus Re V Ltd. 2018-1 cat bond sponsored by Nationwide. This tranche saw its secondary mark decline by 90% on some pricing sheets as of February 26th, from mid-50’s to as low as 4 cents on the dollar, but by March 5th it had been marked back up significantly to over 30 cents on the dollar, a significant recovery.
There have been some other significant price increases on Caelus Re cat bonds in certain broker pricing sheets, with with B2 tranche of the 2020 Caelus Re VI deal leaping over 100% week-on-week.
For bonds like these, it’s clear the initial market response was to mark them down severely in anticipation of losses, but that sentiment has now adjusted to expecting a more minor loss, or just further annual aggregate deductible erosion.
Across USAA’s exposed Residential Reinsurance catastrophe bonds, some have seen their secondary marks recover by more than 30% or 40% week-on-week, to March 5th.
For Allstate’s exposed Sanders Re catastrophe bonds, two tranches have recovered by more than 45%, week-on-week, while another saw a 10% increase in its secondary mark.
For all three cat bond sponsors though, there are other tranches that were marked down and their secondary prices have remained relatively flat, suggesting these cat bonds are seen as just as exposed as they were a week earlier.
With the markdowns having been reduced, it suggests cat bond fund managers, investors and brokers have all had more time to analyse the potential for losses and some decisions to effect significant markdowns have now been rolled back a degree, as greater clarity on the loss potential emerges.
That’s positive for cat bond funds and their investors, as these secondary market adjustments should wipe off some of the decline seen a week earlier.