Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

Cat bond bid list fails to fully trade again, gulf between buyers & sellers persists


Catastrophe bond market liquidity continues to feel the effects of the coronavirus pandemic, with liquidity still slow as evidenced by another bid lists of cat bonds available for sale failing to fully trade, our sources said.

trading-screenAs we’ve explained in recent coverage, the catastrophe bond asset class has again demonstrated the liquidity benefit it offers to investors, as many more generalist funds holding catastrophe bonds had decided to sell their positions.

The catastrophe bond once again demonstrated that is one of very few assets where, at a time of severe financial market stress such as we see with this Covid-19 coronavirus pandemic, an investor can sell for close to par securing cash to hold onto or for deployment elsewhere.

The selling off of catastrophe bonds has not just been by generalist investors either, as recent lists of cat bonds available for sale have also come from recognised dedicated ILS and reinsurance investment fund managers.

At the end of March it became evident that liquidity was slowing across the secondary cat bond market, as buyer and seller ambitions moved further apart and one bid list in particular failed to fully trade due to the bid-ask spread that emerged.

We’re told this bid-ask gap persists and that another catastrophe bid list has failed to fully trade in recent days.

Sources said that only a handful of the roughly 25 bonds available for sale traded from this particular bid list, representing around 30% of the total cat bond volume that was available. The total volume was only somewhere around $25 million to $30 million, we understand, so not a significant chunk of outstanding bonds or anything like that.

But still the market couldn’t clear them all it seems, as once again buyer and seller price ambitions did not meet.

It’s hard to say exactly why this is occurring at this time, but it likely comes down to availability of capital and the perception of what opportunities are coming available to cat bond, ILS and reinsurance investors right now.

Capital availability because the recent selling off of cat bonds at below par pricing by more generalist and multi-strategy investors has likely soaked up a lot of available liquidity. In addition any redemptions being seen may be driving the sales of bid lists, as well as reducing available capital for buying them.

But opportunity related to, as with the mid-year renewals approaching ILS investors may be focusing on the potential for much higher reinsurance rates to come available, given the global economic and market situation.

It’s also a reflection of the desire for higher returns at this time, likely driven in part by the economic situation and a realisation that catastrophe bond yields need to move upwards to match any coming rise in reinsurance returns.

All of which means that this gulf between buyers and sellers, or bid and ask, likely suggests that primary catastrophe bond issuance could be challenging at this time, as demand for yield seems to be outweighing the need for deployment of capital.

As we explained before, the recent selling off of catastrophe bonds (and their buying by specialist cat bond funds) may reduce available capital, is likely to slow down primary issuance as capital inflows may need to catch-up.

But, as well as inflows, there’s also appetite to consider and with the uncertainty the pandemic has created among investors, the expectation that reinsurance rates could rise further and faster after this, as well as the crunch in immediately available capital, some impacts to primary issuance are almost guaranteed until broader markets stabilise and investor confidence returns to investments in general.

Until buyers and sellers price ambitions meet, which likely requires capital inflows to return or one sides ambitions to adjust to match the other, liquidity may begin to stall to a degree for this larger lists of bonds that come to market.

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