Ongoing high levels of demand for catastrophe bond investments continued to push up pricing in the secondary market in June, with non-U.S. issues seeing the highest rises as the seasonal effects of the hurricane season helped to keep pricing of U.S. wind bonds a little more subdued.
The evidence that the insurance-linked investment market needs more catastrophe bond supply is very clear, with prices rising in recent months as investor demand meant many outstanding cat bond issues were well bid.
One effect of this is that many secondary market cat bond positions are now priced above par, making them attractive to sell but perhaps less attractive to buy for some investors.
But with large investors and the leading ILS fund managers are having ample capital and a need to continue to diversify portfolios around the mid-year renewals, trading remains relatively active in June and prices continued to rise as bids were met.
Another effect of the consistent price rises has been improved performance from catastrophe bond funds and cat bond focused ILS portfolios, with the total return of the outstanding market strong in recent months.
Of course, prices cannot always stay above par and these gains will likely be lessened at some point in the future, likely as capital flows in, seasonal effects manifest themselves, or as investors shift focus back to collateralized reinsurance markets in time for January.
Craig Bonder, Managing Director at AK Capital, commented on June’s secondary cat bond performance; “Another strong month of performance in the secondary cat bond universe. The market remained ripe for sellers with offerings being lifted at new highs every day. Non US wind as usual remained well bid with earthquake perils trading sub 200dm in some cases.”
There will have been an element of profit taking in recent weeks, as larger ILS funds may have decided that price rises have made it attractive to sell cat bond positions which they can easily reinvest in collateralised reinsurance and private offerings.
That means there are buyers too, perhaps investors with a need to deploy capital, who can still see the value in growing their portfolios of cat bonds even at above par pricing, often seeking to hold for seasons or even until maturity.
Zurich based ILS and cat bond investment manager Plenum Investments also commented; “The secondary market continues to see strong demand and ensuing price increases, especially for non-US hurricane bonds. Gator Re is the only exception; the bond traded down significantly, as the annual aggregate losses from tornado events covered under the reinsurance contract are getting closer to the attachment point.”
As we move through the U.S. hurricane season cat bond funds will benefit from a seasonal performance increase for holding exposed U.S. wind bonds. With the additional performance increase caused by rising prices due to demand, some cat bond funds could see another strong month for July.
Finally, it was also interesting to see that the catastrophe bond market once again demonstrated the lack of correlation the asset class has with broader financial markets, with the Brexit vote having no impact to ILS positions.
Bonder explained; “It was interesting to see if Brexit (both on and off the pitch) and the corresponding markets volatility would bring about some selling in the ILS space but it seemed once again this non correlated market brushed off any such thoughts.”
Plenum Investments concurred, saying that Brexit left no mark on the catastrophe bond market.
Demand is likely to remain high for non-U.S. wind catastrophe bonds through the rest of July, especially as some ILS managers will have been adjusting their portfolios in order to accommodate newly underwritten private contracts from the June and July reinsurance renewal.
It will be interesting to see just how high prices can go, as at some point even the diversification offered by non-U.S. perils will become less attractive as the above par pricing eats into the yields investors could earn by holding these cat bonds.
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