Aon foresees robust primary & secondary cat bond market in 2017


Insurance-linked securities (ILS) and catastrophe bond investors will be able to take advantage of a robust primary and secondary market in 2017, driven by the expectation of an active start to the year, says Aon Securities.

In a recent report Aon Securities, the capital markets reinsurance broker, dealer, arranger unit of insurance and reinsurance broker Aon, has commented on the secondary market trading environment in 2016 and what the coming months might hold for investors in the ILS and catastrophe bond space.

Secondary trading activity in the first-half of 2016 outpaced that witnessed in the final two quarters of the year, although this trend was also evident in the secondary market in 2015, says Aon.

FINRA’s Trade Reporting and Compliance Engine (TRACE) shows there were a total of 428 trades during the second-half of last year, which amounted to $427.9 million. When compared with the first-half of the year Aon notes that this represents a decline in trade volume of 19%, and dollar volume of just fewer than 23%.

“The reduction in secondary activity was primarily
due to the overall decrease in activity on the primary markets throughout 2016, as well as a high level of upcoming maturities scheduled in the first half of 2017,” explains Aon.

In response to market conditions and a high volume of deals scheduled to mature in 2017, which also includes the $1.5 billion Everglades Re Ltd. (Series 2014-1) deal – the largest ever cat bond, investors decided to hold their positions, says Aon.

“Additionally, October was a light month for catastrophe bond trading as investors waited for the full impact of Hurricane Matthew to be realized,” continued the reinsurance broker.

In October 2016 Matthew became the first hurricane to make landfall in the U.S. since hurricane Sandy in 2012. The initial track and expected intensity of the storm as it approached the U.S. coast saw a number of trades takes place at “reduced or distressed pricing.”

But as noted by Aon, the impact from the storm was less than expected and all bonds rebounded within a week after landfall.

Short-dated off-risk U.S. wind bonds saw the highest volume of trading activity in 2016, driven by the maturity of a number of deals prior to the 2017 wind season.

Cranberry Re Ltd. (Series 2015-1), Everglades Re Ltd. (Series 2014-1), Everglades Re II Ltd. (Series 2015-1), Alamo Re Ltd. (Series 2014-1), Alamo Re Ltd. (Series 2015-1) Class A and Class B, and Armor Re Ltd. (Series 2014-1), all reported 10 trades or more, the majority of which were U.S. wind exposed deals.

“Opportunistic buyers were able to purchase short-dated bonds at decreased prices as the wind season came to a close and the maturity date approached,” notes Aon.

Regarding the impact of loss events in 2016 on in-force catastrophe bonds Aon highlights Gator Re Ltd. (Series 2014-1), which filed for an extension notice prior to its scheduled maturity.

“Given expectations for a fairly active issuance calendar in the first half of 2017, our firm expects investors with available capacity as well as freed capital from the impending maturities will be able to effectively redeploy capital in a robust primary and secondary market,” concludes Aon.

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