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$6bn of secondary trading in 2015 shows cat bond liquidity: Emmerson


An estimated $6 billion of catastrophe bonds were traded in the secondary market in 2015, underlining increased liquidity in the sector as investors become more and more comfortable with the asset class, according to Steve Emmerson of Tullett Prebon.

Liquidity in the secondary market for trading insurance-linked securities (ILS) instruments, including the traditional 144A catastrophe bond, private catastrophe bonds, and in more recent times sidecars, has been on the rise and the momentum looks set to continue as the sector moves further into 2016.

Wholesale financial markets intermediary and trading facilitator, Tullett Prebon’s Head of ILS & Insurance Desk Steve Emmerson has executed secondary market trades with more than 50 counterparties across the globe.

Clients typically include dedicated ILS funds, re/insurance company funds, multi asset managers, pension funds, multi-strategy hedge funds, and investment banks, with each having similar, and different reasons and needs to trade ILS instruments in the secondary market, explains Emmerson.

Reasons for trading cat bond transactions range from seasonality, portfolio optimisation, new issuances, maturities, and even day-to-day trading in order to make a quick profit, although Emmerson notes that the latter isn’t too common, but it is happening.

Furthermore, changes in risk modelling can result in a change to the expected loss of a deal, which might lead investors to adjust their portfolio and optimise potential returns.

As noted above, new issuances in the catastrophe bond sector is a key driver of trading activity in the secondary market, which in turn relates to increased liquidity, says Emmerson.

The catastrophe bond market achieved outright growth again in 2015 as issuance levels remained strong on the back of a record-breaking 2014, with issuance in the first three months of 2016 being fairly active so far as well, as data from the Artemis Deal Directory shows.

When issuance levels are high ILS investors appear eager to free up capital to invest in the range of new, diversifying cat bonds and also for reinsurance renewal periods, highlighting how the secondary market provides investors with a valuable source of liquidity.

“Without a shadow of a doubt market liquidity is increasing, and therefore buying and selling is a daily event,” said Emmerson, continuing to stress that it’s become more and more liquid as people are beginning to buy into more of the tradable ILS assets.

Based on the trading that Tullett Prebon sees through its ILS desk, the company can make a decent estimate of market liquidity in secondary catastrophe bond trades.

“Our estimate of the total market volume traded in the secondary market, one side, in 2015, is $6 billion,” Emmerson explained.

“Our trade count and our notional volume is increasingly significantly year-on-year,” he continued, something that he stresses is a sign of increased liquidity and investor comfort.

The issuance and utilisation of ILS instruments by either dedicated funds, reinsurers, insurers, and so on is growing, and as a result trading activity in the secondary market appears to be on the rise, which in turn is leading to greater liquidity in the market and increased investor comfort, which could lead to further issuances, taking the cycle full circle.

Emmerson underlined this beneficial cycle; “I believe that as liquidity levels increase, and more guys are getting the feel for trading and the advantages of trading, and the advantages of liquidity, it’s kind of snow balling.”

The low correlation and diversifying nature of ILS instruments are clearly attractive to investors even at times when potential yields are reduced owing to challenges in the global insurance and reinsurance landscape.

And, with issuance levels expected to be in line with more recent years and the expectation that ILS capacity will increasingly find its way into new risks and geographies, it’s likely trading activity in the secondary market will continue to be strong and even grow, as investor experience and understanding grows with the maturity of the asset class.

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