The secondary market for trading in catastrophe bonds and insurance-linked securities (ILS) saw relatively brisk activity in March, as investors juggled portfolios to accommodate new issues, but with the focus and demand for higher-yielding notes rising once again.
With primary catastrophe bond transactions that priced in March seeing all coupons coming in below 6% and an average yield across the deals of nearer to 3%, investors remain very focused on gaining access to vintage cat bond notes which yield higher returns.
Craig Bonder, Managing Director at AK Capital, discussed the new issuance and resulting secondary market trading activity; “An active month of March in both the primary and secondary Catastrophe Bond Markets. Five public deals were placed totaling over $1 billion ($750MM and 35B YEN) vs 525mm of maturities for a net gain of ~$500mm in outstandings. As is usually the case, the new issues spurs secondary activity as portfolio rebalancing takes place amongst accounts.”
While issuance in the primary cat bond market has been brisk right through the first-quarter of 2015, as detailed in Artemis’ latest market report here, and this stream of deal-flow has continued into Q2 it has its effects on the secondary market.
Bonder explained; “The overall yield of this new issuance seems to have spurred activity and price movement this month. All five deals priced below 6% with the average spread of the five deals being issued at ~305bps. This issuance put further downward price pressure on some of the lower yielding issuances done in 2014 that already were somewhat struggling this year.”
Of course this once again raises the question of where the higher-yielding investment opportunities may come from for ILS investors? There is a significant demand for yields of 6% and upwards, but a dearth of transactions which offer that kind of coupon.
This presents a significant opportunity for those cedents that may seek to protect themselves with lower-cost reinsurance capital and higher attachment probabilities. The ILS and cat bond market investors would likely soak up any issuance coming in at higher yield points.
“As such we saw a continuation of many sales below par. It will be interesting to see where this stabilizes and when the market turns the conversation to price appreciation on these sub-par bonds. In the meantime it seems the market would very much welcome some less remote higher yielding product as by all accounts overall demand for this asset category remains robust,” continued Bonder.
Zurich-based ILS and catastrophe bond investment manager Plenum Investments commented on an apparent stabilisation of secondary prices on some marks during the month of March, indicating some seasonality returning.
“Supported by seasonal factors and the strong issuance, the premium situation has stabilized. Investors do not seem willing to take risks at ever lower premiums. Consequently, and after two years with atypical price development in the first and second quarter, we finally revert to normal price trends. This is particularly evident in the increase of risk premiums for US hurricane positions, which causes mark to market losses of these bonds,” Plenum Investments commented.
Looking ahead for the rest of the second-quarter, Plenum expects price pressure on secondary marks will be lower and as a result some positive gains may be realised, particularly on U.S. wind cat bonds as hurricane season approaches.
Plenum explained; “Since the issuance activity usually slows down in the second quarter, there should be less price pressure on CAT bonds from this side and the seasonal losses ahead of the hurricane season will be reversed after we enter into the season.”
The secondary cat bond and ILS market remains driven by market trends, including the seasonal price adjustments, the expectation of new issuance, the search for higher-yielding notes, the rotation from cat bonds into collateralized reinsurance and also the need for a continued stream of new issuance to diversify portfolios.
With issuance remaining brisk and the primary catastrophe bond issue pipeline looking strong still it may be a while before the pressures are alleviated. We’ll update you again next month.