Once again, July saw very strong demand for catastrophe bond investments with the secondary market feeling the effects of demand outstripping supply of new issuance, resulting in further price rises and an active cat bond secondary trading market.
Recent months have been characterised by growing catastrophe bond demand, as some investment managers seek to put capital raised to work and others look to adjust portfolios for diversification.
With the secondary market for catastrophe bonds often the only option for deploying capital or adjusting portfolios, around the reinsurance renewal seasons, it can see high levels of bids and demand, as we have seen lately.
It’s a further reflection of the fact that the reinsurance market is just not producing enough catastrophe bonds and institutional investors still want more cat bond assets, no matter how popular the collateralised reinsurance and private ILS transactions have become.
July saw secondary marks rising further, sometimes unseasonably, as buying pressure helped to ensure investors and ILS funds experienced a strong total return from the cat bond market once again.
Craig Bonder, Managing Director at AK Capital, commented on July in the secondary cat bond market; “Another very strong month of performance for catastrophe bonds as shown in the month end returns. With limited new issuance demand remained strong in the secondary markets across perils and regions.”
Bonder also said that activity was high in the market; “Volumes up until this week were strong as well as investors continued looked to optimize their portfolios as we headed into August.”
There are a number of cat bonds in the market which are not favoured by experienced ILS fund managers and investors, for structural reasons or due to uncertainty about the ceding companies business, however a look at secondary pricing sheets shows that even some of these notes are trading at higher prices now thanks to the strong demand.
Zurich based ILS and cat bond investment manager Plenum Investments also said; “Prices of CAT bonds continued their upward trend, driven by this strong demand and the typical seasonal spread tightening.”
Activity was strong as well, Plenum Investments noted, as “investors made final adjustments to their portfolios before the peak of the hurricane season in August and September.”
Looking ahead, Plenum Investments said that with peak hurricane season now upon us, the cat bond market should expect further movement on secondary positions, as; “Without loss activity, this should drive the spread tightening in the coming weeks. We anticipate an accelerated price increase on US hurricane bonds.”
The cat bond market seems to be facing a conundrum. Demand is high but issuance isn’t satisfying it. Even the record first-quarter saw some investors seeking out more opportunities to access securitised risks, suggesting we need to see a much higher level of issuance to actually dampen this pent-up demand.
This does present an opportunity to ceding companies, as any trip to the cat bond market for reinsurance coverage should find favourable conditions and ample appetite. However, it’s important that appetite does not result in continued pressure on issuance spreads, as investors need to maintain discipline on pricing.
More important perhaps, is to renew the pressure to make catastrophe bond issuance more efficient and cheaper, to take costs out of the equation which would enable the end price of coverage to be reduced for ceding re/insurers, which could stimulate an increase in new issue volumes.
We often talk about the ILS and cat bond market disrupting reinsurance, but it seems that it perhaps needs to find a way to disrupt itself in order to unlock a much larger pipeline of risk to be securitised and soak up some of the demand investors are showing right now.