Demand for investing capital into catastrophe bonds drove prices higher in the secondary ILS trading market during April, as a lull in primary issuance pushed investment managers to trading desks in search of opportunities to invest.
The price rises seemingly happened across the secondary market for catastrophe bonds, including on U.S. hurricane exposed positions even with the wind season approaching rapidly.
The rising prices continued the trend from March, when slower activity levels, due to less demand for portfolio adjustments, resulted in upwards pricing pressure on many cat bond positions.
Following on from the record first-quarter for catastrophe bond activity, the second-quarter began more slowly, with just one small private issuance completing in the month and one primary deal from USAA marketing more broadly.
Craig Bonder, Managing Director at AK Capital, said that this resulted in an overweight secondary market.
“We mentioned we were starting to see a pick up in activity towards the end of March and that continued into April. However the market does still appear to remain very overweight buyers as broad based offerings were quickly purchased. And each trade print seemed to hit a new high despite the summer US storm season approaching,” he explained.
Zurich based ILS and cat bond investment manager Plenum Investments saw similar effects in the market, from their position as a buyer and seller of cat bonds, saying; “Secondary trading continued to be active. CAT bonds are still in high demand and ILS investors had to turn to the secondary market in order to deploy capital because of the lack of new issuances. This led to price increases of the outstanding bonds, despite the approaching hurricane season in the North Atlantic.”
Perhaps a little surprisingly, there was no evidence of any secondary impact to Japanese earthquake exposed cat bonds after the two quakes which struck the Kumamoto region of Kyushu, Japan in April.
Plenum Investments commented; “The earthquakes which struck Japan between April 14 and April 16 did not cause losses that were significant enough to create a dent in the price.”
Bonder of AK Capital concurred, saying; “Interesting to note was despite a number of earthquakes throughout the globe including Japan no Cat Bonds were deemed at risk or even slightly traded off by the market.”
That’s a sign of the sophistication of the cat bond market investor base, that they are amply aware of the magnitude of events required to trigger such cat bonds. The Japan quakes, while a severe natural disaster likely to cause a number of billion dollars of both insurance and reinsurance losses, were not of the level of severity that would concern cat bond attachment points.
With prices having increased over the last two months it becomes even more important for investors to be disciplined when deploying capital into the catastrophe bond market, in order to ensure positions are selected that can be profitable.
Buying U.S. wind exposed cat bonds at inflated prices just before a hurricane season which, based on the forecasts, could be a little more active than recent years could prove more challenging, as some bonds will certainly begin to see prices decline as June and July approach.
When secondary prices have risen it can also signal an opportune moment for primary issuance as well, given investors may prefer to deploy capital into new transactions at par rather than risk a competitive secondary bidding battle for outstanding marks.
But, whatever happens to secondary prices and primary issuance, demand is expected to remain high. Especially since a number of new UCITS catastrophe bond funds have been launched by ILS managers in recent months, which will all be hoping to build scale and need the product to deploy new capital inflows into.