Secondary catastrophe bond market becomes more balanced in May

The month of May saw the market for secondary positions in outstanding catastrophe bonds continue to see more liquidity, as issuance of new catastrophe bonds continued to be strong throughout the month and investors used the secondary cat bond market to rebalance portfolios allowing them to participate in the new issuance.

In total we recorded just over $1.5 billion of new catastrophe bond issuance settling during the month of May. The transactions which completed during the month were; $350m Sanders Re Ltd. (Series 2013-1) from Allstate, $140m Pelican Re Ltd. (Series 2013-1) from Louisiana Citizens, $183m Armor Re Ltd. (Series 2013-1) from American Coastal, $300m Long Point Re III Ltd. (Series 2013-1) from Travelers, $20m Sunshine Re Ltd. (Series 2013-1) from Florida Municipal Insurance Trust, $175m Blue Danube II Ltd. (Series 2013-1) from Allianz, $300m Residential Reinsurance 2013 Ltd. (Series 2013-1) from USAA and a private bond which we can only assume completed in May, $36m Oak Leaf Re Ltd. (Series 2013-1) from a Florida cedent.

A very healthy months issuance in the primary cat bond market which has helped to make the secondary market more liquid as trading increased, continuing the trend that began in April. When investment managers want to participate in a new cat bond deal they often need to offload some other cat bond notes in order to keep their portfolio well-balanced.

The secondary cat bond market is where the buying and selling of cat bond notes occurs and activity in the secondary market is very much affected by the primary issuance trends. Swiss based insurance-linked securities (ILS) fund manager Plenum Investments said that the healthy primary cat bond market brought solid activity in the secondary market as investors looked to rebalance portfolios so they could accommodate new issues in their portfolios.

Plenum said that secondary catastrophe bond spreads have now finally stopped the tightening that has been a feature of this year so far. Throughout 2013 we have seen unseasonal spread tightening on secondary market cat bonds, which resulted in welcome, but stronger than perhaps expected, performance for some investment managers and ILS funds.

Plenum sees this as a balancing out of the catastrophe bond market, as supply from primary issues has now become sufficient to lower the focus we saw on secondary mark purchasing earlier this year. Supply and demand dynamics have now become more balanced and as a result we have seen price returns in the outstanding cat bond market move towards more typical trends. Plenum Investments said that prices across the range of perils are returning to their more normal, seasonal patterns.

One interesting factor that Plenum mentioned for May was that it saw some spread widening on hurricane exposed cat bond positions. This, it said, was a temporary seasonal adjustment and it expects hurricane cat bonds to see spread tightening as we move through the 2013 Atlantic hurricane season. Further tightening will help to assure fund managers continue to see attractive returns unless we see some major catastrophe events threaten the cat bond market.

So May saw another month of positive returns for Plenum and we expect that the majority of the ILS fund manager market will have experienced similar positive, although a little lower than previous months in 2013, performance. June should see more of the same and could also be an active month for secondary cat bond trading as we have four new catastrophe bonds currently being marketed this month. We will keep you updated.