Cat bond market liquidity slows, as bid list fails to fully trade

Catastrophe bond market liquidity appears to have slowed towards the end of this week, evidenced by one of the latest bid lists of cat bonds available for sale failing to fully trade, suggesting a perhaps growing gap between buyer and seller price targets.

As we’ve been explaining in our 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 opted to sell their positions.

The catastrophe bond is one of the 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 for deployment elsewhere, or just to hold.

The catastrophe bond demonstrated its liquidity in exactly the same way during the financial crisis as it has today during the pandemic. It’s an asset an investor can be assured of getting a good price for when sold, even when all else around it has fallen through the floor.

When trading picked up over the last few weeks it was largely driven by long bid lists that were offered to the market on behalf of more generalist and multi-strategy investors who were looking to sell their cat bond positions to secure cash.

This week saw a bid list brought to market on behalf of a dedicated insurance-linked securities (ILS) fund manager, our sources have told us.

But this list of cat bonds for sale, which were told there was nothing particularly unusual about in terms of the specific names featured, didn’t get the reception that some of the earlier bid lists had received.

In fact, we’re told that only circa 60% of the list traded, which is a little surprising at this time but there are a number of possible drivers here.

First the motivation of the seller. Could it be an ILS fund that has had a redemption request and needs cash to fund that?

It seems doubtful, as you might have expected an ILS fund facing an urgent need for cash to fund an investor exit to sell at prices that would have always found buyers.

It seems more likely that this would be an ILS fund looking to cash in some of its cat bond portfolio in order to reinvest that at potentially higher rates into other reinsurance instruments. However, we can’t confirm.

But that second seller scenario would have driven an ambition for higher pricing, so better than was seen with the bid lists from multi-strat funds that all seemed to trade for a few points below par no matter how long-dated or out of season the cat bonds were.

On the buyer side, this might not have met with the ambitions of those with capital available to buy up lists of cat bonds at this time, who after experiencing the last few bid lists from generalist investors would likely be hoping for more of the same, an opportunity to snap up premium cat bonds at below par prices.

Another market dynamic to consider, is that specialist ILS funds and direct investors with ILS experience may all be expecting some further rate improvements to come through at future reinsurance renewals and also thinking that the implications of this ongoing coronavirus pandemic may be for even more upwards pressure on reinsurance and retrocession rates.

So, with that in mind, ILS funds and investors may not be keen to deploy too much capacity into cat bonds at this time and if they were going to they might want to see a more attractive price for the buyers, to reflect the potential return uplifts many are hoping for.

All of which suggests a gulf emerging between buyer and seller price targets, as well as a perhaps growing ambition for higher rates among ILS funds and their investors.

Which will likely have some ramifications for new issuance, we’d imagine. Perhaps also for the secondary market.

There is only one catastrophe bond currently in the market, the recently launched Atlas Capital Reinsurance 2020 DAC (Series 2020-1), sponsored by global reinsurance firm SCOR.

With this cat bond SCOR is seeking at least $200 million of ILS market backed retrocessional reinsurance protection. But the reinsurer won’t be seeking that coverage at any price.

Catastrophe bond market dynamics are moving very quickly right now. It’s going to be interesting to see what the market reception for this new Atlas cat bond from SCOR is like and whether the book fills to the $200 million target within the initial price guidance.