One again the secondary market for catastrophe bonds remained characterised by very strong demand in August, with more buying interest than selling driving prices again. However some sellers were seen providing fund managers and investors with opportunities to diversify.
Growing catastrophe bond demand is affecting the secondary market in 2016 once again, as like other recent years the primary issuance market is unable to satisfy cat bond investor and ILS fund manager demand for the liquid securities.
The result is upwards pressure on pricing, tighter spreads and unseasonable price rises across a lot of the outstanding catastrophe bond market, resulting in a seller’s market as any cat bond notes offered likely fit some investor of ILS fund managers mandated needs and are quickly snapped up.
Craig Bonder, Managing Director at AK Capital, explained that secondary cat bond trading activity was not consistent in August 2016; “It felt like a somewhat typical quiet August month for most of the month however laced with a few days of bursts of activity. In general the market remains very well bid across perils and perhaps even stronger than ever for diversifiers.”
Zurich based ILS and cat bond investment manager Plenum Investments noted the continued rise of secondary cat bond prices in August, saying; “The situation in the secondary market remains unchanged. Demand continues to be strong across all perils and regions and prices of CAT bonds are driven up by this strong demand and the typical seasonal spread tightening.”
The issue with price rises due to strong and unsatisfied demand is that they could drop once primary issuance picks up again, as when demand is met through ample cat bond issuance the secondary market tends to see less upwards pricing pressure.
This does mean that there are likely some investors in the market with at least a portion of their catastrophe bond portfolio exposed to a reversal of recent pricing trends.
In August there was at least some opportunities for those looking to buy cat bond notes.
Bonder commented; “Despite the lack of issuance and the somewhat muted storms on the horizon we did have days where sellers came out and product was available that than quickly traded.”
Plenum Investments was one of those investment managers that benefited from sellers coming to market, adding a number of positions that are beneficial to its cat bond fund portfolio.
“A few sellers came to the market and we were able to purchase a few bonds in order to further improve the risk return profile of the fund,” Plenum said.
Seasonality is also playing out through recent weeks, with premium allocations from U.S. hurricane risks making a significant contribution to catastrophe bond funds, as well as to other ILS funds that invest in private ILS deals or collateralised reinsurance.
This is anticipated to continue through the peak month of September and into October, however if there is no major threat to the U.S. from a storm during September we could see any seasonality in pricing tailing off earlier than expected, as was witnessed last year.
We should likely get used to this trend, that whenever the primary issuance market quietens down demand for secondary positions increases, forcing prices higher and reducing the number of sellers in the market.
In an ideal world catastrophe bonds would not be a strictly buy and hold investment. There would be sufficient issuance and liquidity in the market to enable trading to be more active and investors or fund managers to offload and acquire positions much more easily. But in this softened and competitive reinsurance market this is how things are for now.
Investors will be hoping for an uptick of catastrophe bond issuance towards the end of the year, in order to deploy capital and acquire the diversification they need.