Investor demand for catastrophe bonds remains high in January

Demand for catastrophe bonds from capital markets investors and specialist insurance-linked securities (ILS) fund managers remained strong in January, with both primary issued catastrophe bonds and secondary traded bonds seeing high demand.

With four new issues coming to market in January there was at least a chance of soaking up a little of the excess demand for cat bond and ILS notes, but the $350m of issuance does not seem to have been anywhere near sufficient to temper the appetite for new paper.

All four new transactions met with strong demand, according to reports, with one ILS investment manager, Plenum Investments, saying that the medical benefit and health insurance linked bond from Aetna, Vitality Re V Ltd., was oversubscribed by four or five times highlighting the strong investor demand for new or diversifying ILS opportunities.

The other catastrophe bond deals which completed in January were the $25m U.S. multiperil Dodeka I, the $25m U.S. quake and wind Omamori and the $100m U.S. quake and severe thunderstorm Skyline Re Ltd. All of these bonds were also reported to have received strong demand, even those which were privately marketed to small groups of investors could likely have upsized if required due to the excess demand.

The secondary market, for outstanding catastrophe bonds and ILS, saw strong trading activity during the first half of January, but this activity tailed off towards the later part of the month. Plenum Investments said that demand for cat bonds on the secondary market exceeds supply, suggesting more buyers than sellers are active, which has pushed prices higher yet again.

As Artemis wrote last week, a feature of last year was rising secondary market prices on cat bonds and ILS. Demand for acquiring cat bond paper has exceeded supply all the way through the year, despite the high level of primary issuance. That resulted in price rises on secondary marks, with many cat bonds selling a few points above par.

January seems to have been no different, with the secondary market continuing to tell a story of insufficient supply of new cat bond paper. It will take significant issuance of new cat bonds to soak up demand and with high levels of maturing cat bonds in 2014, there will be even greater demand to put money back to work at investment managers.

In terms of seasonal price movements, Plenum Investments said that typical seasonal price patterns were witnessed across the various perils and risk classes. U.S. hurricane and Japan typhoon cat bonds saw average price decreases of 50 basis points while European windstorm bonds increased by about 50 basis points and U.S. earthquake, Japan earthquake and Europe earthquake bonds were on average flat.

Craig Bonder, Managing Director and Head of ILS Trading at AK Capital, said that January had a very strong start, with higher pricing and increased trading activity in the first half of the month. Similarly to Plenum, Bonder noticed trading slow right down later in January, with limited sellers in the market.

This is no real surprise, with high levels of maturing cat bonds shrinking the amount of available investment opportunities in the market. The result of which is investors and ILS managers holding positions and reluctant to sell unless required for portfolio diversification.

Going forwards further spread tightening is to be expected on European windstorm cat bonds as we move through February, with the season approaching its usual peak.

Artemis will update you on secondary cat bond market conditions again next month.