Swiss Re Insurance-Linked Fund Management

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Active cat bond trading in July, as performance turns positive


Trading activity in the secondary market for catastrophe bonds and insurance-linked securities (ILS) was high in the month of July, as investors sought to deploy capital and balance portfolios, all of which has contributed to the stabilisation of prices and a positive cat bond market return.

After months of price declines seen across the secondary cat bond market, both June and July saw the much-discussed pricing floor becoming more evident, as prices stabilised and eventually turned upwards, ultimately helping the market to its best return for some time.

The emergence of some proper seasonal returns on U.S. wind exposed catastrophe bonds has also helped the market to stabilise and stemmed the decline in prices. However, despite this there remains a number of bond picker opportunities in secondary cat bonds on certain marks which have yet to rebound.

Following three straight months of pricing pressure, which had pushed the majority of outstanding cat bond tranches pricing to levels below par, many of these positions are now heading back towards par and expected to be priced at 100 or greater in the coming weeks.

As a result, those savvy cat bond pickers, who bought positions at the low levels seen in the last few weeks, could stand to profit as this years seasonality is unloaded on secondary positions.

Even the lower-yielding peak peril cat bonds, which have been positively out of favour in recent weeks, saw some rebound in their prices through late June and July.

Catastrophe bond fund managers will be pleased with better returns and July looks set to be perhaps the best performing month of the year so far for investors in cat bonds.

“July was quite an active month in secondary trading with many investors looking to rebalance portfolios and deploy capital,” explained Craig Bonder, Managing Director at AK Capital.

“With limited new issuance supply this capital made its way into the secondary market and along with another month of seasonality helped lift prices across the board for a very positive month,” he continued.

Zurich, Switzerland based ILS and cat bond investment manager Plenum Investments also noted this trend, saying; “Secondary market activity was high in July. In combination with the start of seasonal upward price movements for US hurricane bonds, this lead to a stabilization of CAT bond prices.”

The price rally is expected to continue for U.S. wind cat bonds, with an acceleration of the price recovery expected by Plenum Investments, who said; “For US hurricane positions, the price increase should pick up speed during August and September.”

Plenum noted that seasonal spread tightening is now apparent and that a pick up in seasonal prices in the coming weeks, along with demand for U.S. hurricane cat bonds, should add to cat bond portfolio performance in August.

July has seen the strongest returns of any month this year for the catastrophe bond market, with the Swiss Re cat bond total return index rising by an impressive (for 2015) 0.65% and the price return index by 0.15%, as prices for once rebounded. That compares with declines of -0.17% and -0.69% in June.

In fact, the ILS Advisers Index shows that the ILS fund market is set for perhaps its best return of the year in July, thanks to cat bond performance, with the preliminary average return (based on 41% of funds having reported) now sitting at 0.42%.

With a month of price rises and a much better total return now in the bag, has the cat bond market seen the end of the pricing pressure witnessed earlier this year? It will be interesting to see how the market responds to the closing out of the U.S. wind seasonality later this year, when primary issuance and capital inflows are likely to increase again.

Also read:

Catastrophe bond market ripe for the “picking” in May.

Pricing pressure persists in secondary cat bond market during April.

Secondary cat bond market sees downward pressure on yields in March.

Secondary cat bond market activity a little slower in February.

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