September is one of the peak months of the U.S. hurricane season and so catastrophe bond issuance activity is typically slow and secondary market cat bond trading is often driven by the threat of any tropical storms approaching the U.S. coastline. This results in climbing secondary market prices, particularly in cat bonds with U.S. hurricane exposure. This year has proved no different, with insurance-linked security (ILS) and cat bond fund managers achieving another month of attractive returns.
Insight from Swiss based ILS investment manager LGT Insurance-Linked Strategies tells a similar story of the ILS and cat bond market in September. The LGT ILS team said that they felt the secondary market was fairly quiet in terms of activity in September. However, despite the fact that secondary market trading volumes appear to be quite small, LGT said that there is substantial investor demand for outstanding cat bonds and secondary market prices have continued to climb.
It seems that the investor demand for secondary cat bonds is likely not being fully satisfied at the moment and LGT says that investors are holding onto secondary positions while they wait to see what Q4 brings in the way of new cat bond and ILS issuance.
With no hurricane or Atlantic tropical storm activity threatening the U.S. coastline in September secondary U.S. wind exposed cat bond prices have risen further. The LGT ILS team said that most U.S. wind exposed cat bond positions are now trading at par or above which they say is reflective of the strong interest in the asset class. LGT themselves have not been very active in the secondary market during September, buying a few positions with a focus on improving portfolio diversification and further aligning the portfolio with their targets.
The price increases have helped LGT return one of their best months this year, with one of their flagship USD denominated cat bond funds returning 0.89% for September. They expect returns to remain attractive and that their long-term target performance levels should be achieved. LGT expect the majority of secondary cat bond prices to tighten further in the coming weeks as the hurricane season continues to be benign and we move towards the seasons close. That bodes well for investors for another good month in October, catastrophe impacts aside.
Finally, the LGT ILS team remain bullish on the prospects for the cat bond and ILS space in Q4. They expect investor interest in the asset class to remain strong and expect a number of new cat bonds as they say market conditions are favourable for sponsors and investors are certainly open to new investment opportunities. LGT expect a ‘good number’ of new cat bond deals in Q4 also citing market expectations of 6 to 8 new deals. The LGT ILS team also mention that they believe we could see another European windstorm cat bond come to market in October. That possibility should be well received by investors looking for diversification in advance of new U.S. wind bonds coming to market at the end of the year.