Very active December secondary cat bond trading closes out 2016

by Artemis on January 12, 2017

The secondary trading market for catastrophe bonds was particularly active in December 2016, with almost double the amount of bond titles trading during the month compared to the prior month, as ILS funds and investors balanced portfolios in advance of the reinsurance renewal.

The year saw an increase in liquidity in the secondary catastrophe bond market, at the same time as average yields on new cat bond issues rose in the last two years which has stimulated some increase in trading among investors and insurance-linked securities (ILS) managers funds seeking to swap out of some lower yielding deals that are nearing maturity, for higher yielding opportunities.

Secondary prices have also risen during the year, again stimulated by investor demand and abundant capital in the ILS space again, but this was not to the degree seen in 2014 and 2015, when unseasonal price rises drove the markets price return much higher.

Demonstrating just how liquid December’s catastrophe bond trading was, Zurich headquartered ILS and catastrophe bond investment manager Plenum Investments said that it recorded significantly more trading occurring in December through the data on FINRA’s Trade Reporting and Compliance Engine (TRACE) system.

Plenum Investments explained; “A solid amount of secondary market trades occurred during the month, mainly motivated by portfolio rebalancing.

“According to the Trade Reporting and Compliance Engine (TRACE), 98 CAT bonds have traded on the secondary market during the month, about twice the amount of the previous month.”

In November more than 30 different catastrophe bond names traded during the month, so the 98 seen in December 2016 is a particularly high level of trading activity, which will have been positive for broking desks end of year commissions.

Craig Bonder, Managing Director at AK Capital, explained that while the catastrophe bond market has reached yet another record high, in terms of risk capital outstanding, more issuance is required in order to meet the demand seen and evidenced through the secondary market.

“The market still seems to have appetite for more paper as many times this year we saw largely one way dynamics in the secondary markets with buyers outnumbering sellers,” Bonder explained.

It is encouraging for the market that so many names traded in December though, as it suggests an increasing level of liquidity is being found enabling buyers and sellers to be matched more frequently.

Some of the issuances at the end of 2016 have seen tightening spreads, making the reinsurance and retrocessional protection they offer their sponsors even more efficient. This trend could help to stimulate an increased interest among ceding insurers to access the capital markets through cat bonds, which could stimulate more primary issuance.

For ILS funds and investors this would be extremely welcome, as with over $7 billion of maturities scheduled in 2017 the market will need to see brisk issuance in order to prevent it from shrinking.

With investor demand remaining at a high and cat bond fund managers almost all eager to raise more capital, there is clearly an opportunity for insurance and reinsurance firms, as well as sovereign and corporate sponsors, to utilise catastrophe bonds for risk transfer even more in 2017.

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Also read:

Short-dated cat bonds lead November 2016 secondary trading.

After slow start, cat bond trading picks up in October.

Cat bond trading activity increased in September as seasonality peaked.

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