Bonds designed to protect insurers such as Chubb Corp. (CB:US) and Travelers Cos. (TRV:US) from natural disaster costs are signaling superstorm Sandy probably won’t trigger payouts, according to John Brynjolfsson of Armored Wolf LLC.
While catastrophe bonds exposed to storm damage in the U.S. Northeast have received lower bids from dealers after the biggest Atlantic storm in history lashed the region, most securities are still listed at about par, said Brynjolfsson, whose hedge fund oversees $735 million and owns so-called cat bonds. That includes notes tied to risk at Chubb and Travelers, he said.
“This is not a major industry event” as cat bonds typically pay out on losses at thresholds higher than the projected damage from Sandy, Brynjolfsson said in a telephone interview. “The par bids reflect less enthusiasm about rolling the dice, but it also reflects that, odds are, none of these bonds should attach.”
Cat-bond prices have gained 2.1 percent this year through last week, compared with a 5 percent decline in 2011, even after the securities dropped by the most in eight months during the five days ended Oct. 26 as Sandy approached the East Coast. The storm may have caused insured losses of as much as $15 billion in the U.S., risk-modeler AIR Worldwide said yesterday.
Chubb, which last week reported (CB:US) a 79 percent increase in third-quarter profit on lower catastrophe costs, has cat-bond arrangements of $475 million linked to storm losses in the Northeast and $150 million for hurricane and severe thunderstorm losses in eight states along the southern U.S. coastline, according to an August regulatory filing.
Travelers, the lone insurer in the Dow Jones Industrial Average, sold $250 million of cat bonds in June through a related vehicle that are linked to hurricane damage in the Northeast, according to its quarterly regulatory filing.
Mark Greenberg, a spokesman at Warren, New Jersey-based Chubb, declined to comment on whether the storm would trigger the securities. Jennifer Wislocki of New York-based Travelers didn’t immediately respond to an e-mail message.
Prices of catastrophe bonds, which lose money if damage thresholds are reached, fell 0.4 percent to 94.77 in the week ended Oct. 26, according to the Swiss Re Cat Bond Price Return Index. Total returns of 10.1 percent are still more than triple the 3.3 percent gain in 2011 after the March earthquake and tsunami in Japan killed almost 16,000 people and destroyed about 390,000 homes.
Investor demand for the securities has grown with yields on speculative-grade corporate bonds hovering at record lows as the Federal Reserve holds down interest rates to boost the economy.
About $5.5 billion of dollar-denominated cat bonds issued in 2012 have an average maturity of three years with yields of 9.28 percentage points more than short-term lending rates, according to data compiled by Bloomberg. That compares with a 6.93 percent yield on speculative-grade bonds, Bank of America Merrill Lynch index data show.
“We haven’t executed any trades yet,” Patti Guatteri, director of insurance-linked securities trading at Swiss Re Capital Markets in New York, said in a telephone interview. “Most of what I hear is that investors were willing to buy bonds if they see cheap levels.”
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