Covid-19 cat bond sell-off a challenge to Florida renewals

The Covid-19 cat bond sell-off could hurt capacity in the mid-year Florida renewals, sources suggested, as catastrophe bond prices have dropped considerably in the secondary market in recent weeks with some bulk lots failing to sell in full.

Sources noted that prices for some bonds have dropped to as low as 92-96 cents on the dollar, with excess offers on the market.

A further 22 bonds were offered in bid-wanted-in-competition (BWIC) orders toward the end of last week, totalling about $41mn, but more than 40 percent – or $18mn – has not been traded yet, sources told Trading Risk.

In addition to the latest wave of BWICs, other sell orders were placed for individual bonds as some investors continue looking to cash in on the liquidity of their cat bond holdings.

Cat bond prices fell 1.09 percent from Friday, 20 March to Friday, 27 March due to the sell-off, according to the Swiss Re global price return index. This latest decline marks a slight acceleration of the previous week-on-week drop, when the index fell by 0.81 percent.

Meanwhile, over the same period, the S&P US high yield corporate bond index rose by 4.47 percent, as the US high yield corporate bond market recovered from its hefty drop, which started toward the beginning of March and only bottomed out early last week.

Trends on the secondary cat bond market could restrict capacity and set higher pricing benchmarks across the broader ILS segment for the upcoming Florida renewals, due to the increasingly attractive risk-adjusted returns on offer from discounted bonds.

However, some still suggested that cat bond prices could recover before the mid-year renewals.

“Once all the BWICs have gone through and the selling funds sort out their liquidity issues, prices in the cat bond market will go back to normal very quickly,” one source predicted, noting that this could happen before the Florida renewals – unless global stock and bond markets continue to crash.

This came as Scor today advised investors that it hoped to relaunch marketing of its new Atlas cat bond within a month, after postponing its deal due to market turmoil.

The Covid-19 pandemic has unnerved investors around the world, resulting in a flight of capital away from the equity and bond markets, which has led to trillions of dollars being wiped off exchanges, although last week's US stimulus package helped to ease volatility.  

Last week, on 25 March, Aon Securities CEO Paul Schultz told this publication that BWIC orders submitted to brokers since 9 March had reached $400mn, and another source said 96 cents on the dollar is "the new par".

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