Cat bond trading activity increased in September as seasonality peaked

Trading in catastrophe bonds on the secondary market saw increased activity in September as ILS investors and ILS funds traded positions and prices rose once again as seasonal spread tightening reached what is normally recognised as its peak.

September typically sees very strong price rises for secondary catastrophe bond marks and this year the market did not disappoint, with U.S. hurricane bonds rising strongly as spread tightening reached its accepted peak.

But trading activity was relatively brisk, according to brokers, with cat bonds trading at the price highs that are seen at this time of the year.

Craig Bonder, Managing Director at AK Capital, explained that seasonality and a benign loss environment continued to drive performance in September; “With a tepid month of storm season and limited new issuance the secondary cat bond market once again exhibited both strong total return and dollar price gains.”

But despite the high prices investors and ILS fund managers continued to trade, Bonder said; “Numerous credits traded at recent high prices as sellers looked to lock in gains in anticipation for future issuance or perhaps some market dislocation in this last month or so of US Wind risk.”

Bonder commented that trading activity was encouraging for the month, with some “good flows” seen versus a quieter August.

Meanwhile, Zurich based ILS and cat bond investment manager Plenum Investments noted that the primary market saw an unusual level of issuance in September, with the $700m Nakama Re 2016-1 a large transaction for any September on record.

This higher than average September issuance, as it is usually one of the quieter months in the catastrophe bond market with no major reinsurance renewals occurring, could have helped to stimulate some of the secondary trading activity, as investors and ILS managers sought to optimise portfolios.

Commenting on the secondary cat bond market in September, Plenum Investments said; “With the month of September being one of the peak hurricane month and with limited new issuances, the secondary CAT bond market exhibited standard price gains across US hurricane positions.”

Seasonality drove the strongest price rises on cat bonds most exposed to U.S. wind risk. Plenum explained; “Particularly, US hurricane only positions increased by 1% on average, inline with seasonal spread tightening, JP typhoon positions increased by 30 basis points on average, while all other risk classes remained flat on average.”

With this seasonality, which reflects the way premium flows from reinsurance contracts are delivered as well as the fluctuating seasonality risk, peaking in September it has helped many cat bond fund managers to another strong month of returns.

In fact, ILS returns across the sector, so including private ILS, collateralised reinsurance and catastrophe bonds, are likely to be high for the month of September as loss events remained benign and seasonal premium flows attractive.

Looking ahead, the spread tightening on U.S. hurricane exposed cat bonds will begin to decline through October so cat bond returns are likely to be lower for this month. Hurricane Matthew affected the catastrophe bond market, of course, knocking down prices by over 1%.

But by the end of October those price declines are expected to largely recover and so are unlikely to impact monthly ILS fund returns too much. However private ILS and collateralised reinsurance returns may be hit by Matthew, depending on when ILS fund managers reserve or account for any expected losses from the hurricane.

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Also read:

– Cat bond investor demand continues in August, with some sellers seen.

– Cat bond investor demand & trading strong in July, prices rise further.

– Demand continues to affect secondary cat bond pricing in June.