Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Cat bond liquidity benefits evident, as ILS funds sell to free up capital


Trading of catastrophe bonds in the secondary market has increased in the last fortnight as some ILS fund holders free up capital in advance of the approaching reinsurance renewals, so the benefits of the liquidity within these the fully securitized instruments becomes evident again.

Cat bonds have repeatedly demonstrated their value as a source of liquidity within an ILS fund portfolio in the past, but this year some insurance-linked securities (ILS) fund managers may find this liquidity even more beneficial.

With ILS funds facing the ongoing impacts of what are in many cases their biggest losses ever, from the 2017 hurricanes, which have been added to by a succession of small to mid-sized catastrophe losses in 2018, having access to some ILS assets that can be transferred and sold is proving extremely beneficial.

Cat bonds can be traded on the secondary market, typically using a broker capital markets or trading desk, allowing ILS investors and managers to move in and out of positions, or simply sell to free up capital to put to another use.

With the market now awash with numerous new opportunities to deploy capital into renewal reinsurance transactions, although many of the retrocession renewals have yet to really get started, we’re told that some ILS funds have been selling off chunks of their cat bond portfolios as a way to release capital to put to work in new deals.

It’s hard for investment managers to find the best timing to do this, as it’s not possible to wait and assume there will be a buyer just before your capital is needed to fund a new ILS deal. So we understand some of the recent uptick in cat bond trading is the beginnings of certain managers freeing up capital in order to ready it for reallocation into the reinsurance renewals.

There has also been an element of cat bond trading driven by short-dated names as well, we understand, on top of some anticipation that new issuance may pick up at year-end and into January, and a little selling due to nervousness over typhoon Jebi loss creep we understand, all of which has combined to provide a more buoyant catastrophe bond trading market.

Without liquidity the majority of ILS assets, as collateralized reinsurance is now the majority, cannot be traded making it impossible to free up capital.

Some reinsurance sidecar notes promise liquidity, being listed and 144a investments. But trading in these has always been thin and they tend not to provide a great deal of liquidity.

Hence the catastrophe bond is a particularly valuable instrument for ILS investors and funds, which tends to become even more evident under any sort of market stress situation.

But with new cat bond issuance activity still relatively slow this quarter, it remains to be seen if these investors can replace cat bonds they have liquidated with new issues or whether they have to wait for a more active market to emerge and at this stage it’s hard to say when that might be, given the losses still hanging over potential sponsors.

Also read:

Some ILS funds struggle to even renew core portfolios, let alone grow.

Property catastrophe rates to rise at 1/1 & beyond: Everest Re management.

One sidecar pulled on lack of investor appetite, others questioned on terms.

Capital availability & losses to drive reinsurance rates at 1/1 renewals.

Retro losses could drive price increases in 2019: Goldman Sachs.

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