Cat bond spreads widened in the secondary market as H1 drew to a close: Aon

Spreads in the secondary market for catastrophe bonds began to widen towards the levels seen for primary cat bond transactions as the first-half of the year drew to a close, broker-dealer Aon Securities has said.

Commenting on secondary cat bond market conditions through the second-quarter of 2022, Aon Securities, the investment banking and broker-dealer unit of the insurance and reinsurance broker, commentary suggests that market dynamics changed dramatically as the quarter progressed.

With a particularly active market pipeline and primary issuance timetable through the beginning of the second-quarter of 2022, the secondary cat bond market was not a particularly active trading venue, Aon Securities explained.

In fact, the secondary cat bond market was less active than previous quarters in Q2, with “not many trades were being executed as investors focused on the new issuances at hand,” during April and May.

There were as many as 20 classes of notes from new cat bond issuances in the market at one time during that period, close to as busy as the cat bond issuance space has ever been.

As a result and with many cat bond funds not having significant amounts of cash to invest during this period, the focus on the primary issuance was not surprising.

It’s also worth considering the higher coupon rates available in newly issued cat bonds, as the reinsurance and retro market hardening flowed to cat bond issues as well, making newly issued notes particularly attractive.

As the second-quarter progressed and cash positions became tighter, Aon Securities noted that it “saw increased offer volume, though bids only crossed on occasion as spreads remained wider for primary issuances.”

Through the quarter, Aon Securities estimates that there were around 12 secondary cat bond trades per-week, up until the last of the new issuance priced in June, while, “bidding activity increased with end-of-quarter rebalancing efforts.”

The last fortnight of the quarter was the most active, with around 60 trades crossing, Aon Securities explained.

“Despite the increase in bidding, offers still greatly outweighed bids,” the broker-dealer said, but noted that “spreads began to widen towards levels similar to transactions in the primary market.”

With primary issuance now much quieter, as is expected after the mid-year reinsurance renewals, the secondary market has been more active with portfolio rebalancing, we understand and some evidence of managers trying to sell older vintage cat bonds that pay lower coupons than their more recently issued versions.

That will be an interesting dynamic to watch, as too will how different vintages of cat bonds respond when there are losses, given the improvements in terms and attachments seen of late.

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