We’ve written a number of times recently about the unseasonal returns that the outstanding catastrophe bond and insurance-linked security market has been achieving in recent months. The unseasonal price returns demonstrated by cat bond market indices have continued through June and have only begun to slow into the start of July as seasonality in secondary cat bond pricing returns to a more typical pattern. According to ILS investment manager LGT, it’s strong investor interest that has been creating unseasonal demand.
In their latest monthly managers report the LGT ILS team discuss the unseasonal price returns that have been driving the secondary market. Despite the calm of the primary market in June, LGT said that they saw a “flurry of activity in secondary trading with strong buy-side interest on most outstanding titles.” They agree that this is atypical of the usual June trend when secondary markets would generally be quieter as the market takes stock and watches the Atlantic basin and the start of the hurricane with trepidation. Normally it is cat bonds exposed to U.S. hurricanes which see declines in June but 2012 has seen the trend change, perhaps being pushed back a month or so by the activity in the primary market.
This year, LGT have seen significant price return in June, enabling them (and other investors and fund managers) to recoup some of the mark-to-market losses which characterised secondary market activity in the first few months of 2012. For LGT the unseasonal price returns will have been welcomed and it looks like June has been the best performing month for all of their ILS and cat bond funds so far this year.
LGT say that strong investor interest, due to the lack of primary ILS market activity and other alternate investment opportunities (an important factor that continues to drive the ILS market), has pushed secondary market prices for cat bond positions up again in June. They expect the abundant investor interest in the insurance-linked strategies asset class to continue although unseasonal price gains should slow or decline back slightly as activity has to slow at some point before the hurricane season begins in earnest.
It is beginning to seem as if the extremely active first few months of the year, combined with strong inflows of capital and continuing investor interest has pushed back the time that the hurricane season begins to affect the secondary market. We could be looking at a slight change in the seasonality that secondary trading generally exhibits. Of course, as more diversifying transactions come to market and the ILS market broadens out to become less U.S. hurricane top-heavy it is likely that these seasonal impacts could become less apparent. However with U.S. hurricane risk such a major component of the global reinsurance market, some level of seasonal price changes will always likely be a feature of the cat bond and ILS space.
Finally, LGT’s report states that the market will be largely influenced by the combined influences of an abundance of investor capital and the U.S. hurricane season over the next few months. However, they say that if the hurricane season proves to be benign then the abundant capital could help to keep secondary cat bond market prices firm which in turn will help ILS fund managers achieve more stable returns up to Q4 when the primary market should become much more active again.