International reinsurance giant Swiss Re’s Capital Markets (SRCM) trading desk witnessed its highest volume of activity since 2010, at $950 million of trades from more than 90 separate tranches of catastrophe bond notes during 2015, according to a report from the firm.
The roughly $950 million of trading volume for the SRCM trading desk represents an increase of nearly 40% on 2014’s figure, with more than 90 different tranches of notes and involving over 35 investor counterparties, explains Swiss Re.
The reinsurer notes that the close of 2015 was similar to the beginning of the year, which was underlined by off-risk trading. “With a number of bonds going off-risk and nearing maturity, many investors looked to free up capital to re-deploy into new opportunities,” said Swiss Re.
A similar trend was seen in the closing weeks of 2014, when Artemis reported that secondary cat bond trading witnessed risk spreads widening, as investors looked to free up capital to redeploy into new opportunities, with renewals on their doorstep.
In contrast to this, capital markets investors with excess cash, “looked to reap the benefits of the short-dated essentially riskless coupon,” explained the reinsurer, highlighting that some cat bond investors were looking to capitalize on available yields.
Price stabilisation in the secondary cat bond trading environment, which was first witnessed at the beginning of 2014 according to Swiss Re, continued throughout 2015 and resulted in the steady widening of spreads, something that the reinsurer says also persisted throughout the year.
As the benign catastrophe loss environment and ample supply of capacity from traditional and alternative reinsurance sources continues to pressure rates and minimise returns across the insurance, reinsurance, and insurance-linked securities (ILS) space, cat bond and ILS returns might not be the most attractive to some investors, currently.
But clearly, owing to its extremely low-correlation as an asset class to the wider financial markets, the growing understanding and sophistication of the asset class, and as Swiss Re notes, that “more investors have embraced the underrated aspect of cat bonds,” being the ability to trade them, trading volumes have increased significantly, and “there remains a nice balance of buyers and sellers as trading activity continues to be robust.”
Looking forward, Swiss Re predicts, “that lower yield, lower risk vintage of bonds to return to favor as they transition into an attractive return. Minimum rate on line (ROL) levels will continue to experience pressure as interest rates and the cost of leverage rises. The highest yielding bonds will continue to be in demand.”