No hurricanes = quiet secondary cat bond market in September

The lack of hurricane activity in the tropical Atlantic contributed to a slow secondary market for catastrophe bonds and insurance-linked securities during the month of September, according to some ILS investment fund managers.

In the primary catastrophe bond issuance market two transactions completed at the beginning of September, both bringing opportunities for investor diversification; the Japan quake Nakama Re and the extreme mortality Atlas IX Capital, but only one new deal was marketed to investors during the month. This new deal was another opportunity to diversify, in the recently completed European windstorm Calypso Capital II.

All of these cat bonds offered welcome diversification opportunities to investors and as a result all saw high demand, with Nakama Re upsizing by 100%, Atlas IX by 44% and Calypso Capital II by 75%. As a result of this, it appears a lot of new capital poured into these deals, with investors and ILS fund managers not needing to make significant changes to their portfolios to accommodate the new paper, which in turn meant these deals didn’t stimulate a lot of secondary cat bond trading.

Swiss specialist ILS investment managers, the LGT Insurance-Linked Strategies team, noted that trading volumes on the secondary cat bond market remained fairly limited in September, however continued investor demand helped secondary market prices remain firm even on hurricane exposed transactions.

U.S. hurricane exposed cat bonds showed the expected gains that are expected for that point in the season, with many hurricane exposed positions trading at a premium due to expected seasonality patterns as well as continuing strong investor demand in the asset class.

The LGT ILS team said that investors appear to be holding onto secondary positions and could be waiting to see what the pipeline for Q4 brings in terms of new issuance or potential loss activity.

The firm prices of course will have helped investors to decent returns in September again, with the cat bond market having returned over 1.5% for the month according to one index we covered recently here.

Swiss based ILS investment manager Plenum Investments explained; “Spread tightening on US hurricane CAT bonds continued during the month, with average price increases of 1.8%. Looking at the other risk classes, the prices on US earthquake bonds, European earthquake bonds and European winter storm bonds remained flat; Japan typhoon bonds increased by about 30 basis points and Japan earthquake bonds decreased by about 1%.”

Both of these ILS investment managers also said that the benign nature of the 2013 Atlantic Hurricane Season has contributed to slower trading in the secondary catastrophe bond market. With the hurricane season so far posing no real threat to any outstanding cat bonds there has been little need to sell down any exposed positions resulting in less paper changing hands.

The LGT ILS team said that slow secondary cat bond market trading conditions had been exacerbated by; “The lack of North Atlantic hurricane formation which typically spurs trading activity on the secondary market.”

Plenum Investments concurred, saying; “The secondary market was also quiet due to the lack of activity in the primary market as well as very little hurricane activity.”

Plenum also commented on the value of seasonal hurricane forecasts, adding; “There is value in the forecasts as they seem to be able to indicate whether the activity in a season will be above or below average. However, the significant forecasting errors show that accurately predicting an entire season is difficult and that many of the influencing factors are still difficult to understand and to model. We are still a long way off before we’ll have reliable hurricane forecasting models.”

Looking forwards, both of these ILS investment managers anticipate further price increases in cat bonds, as long as there are no hurricane impacts during the rest of the season. Investor demand continues to be at a high and this demand will continue to lift prices helping ILS funds achieve mark-to-market gains through October and November, if the hurricane season remains benign.