Swiss Re Insurance-Linked Fund Management

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Equilibrium helped to stabilise secondary cat bond prices in January


A more balanced ratio of buyers to sellers in the secondary market for catastrophe bonds resulted in a greater degree of equilibrium during January 2016, helping to support and stabilise prices, while the market saw elevated liquidity thanks to post-renewal portfolio adjustments.

January can often be an active month in the secondary market for catastrophe bonds and this year was no different, with a significant amount of trade completed as ILS fund managers and investors sought to rebalance their portfolios after the renewals.

With ILS funds now so heavily engaged in the reinsurance renewal cycle, the catastrophe bond secondary market can provide a valuable source of diversification and an opportunity to adjust portfolio concentrations after the collateralised reinsurance contracts have been signed at 1/1.

That typically aids liquidity at this time of year but it doesn’t always equal a balanced market, in terms of buyers and sellers, which can result in greater pricing pressure as investors and ILS fund managers seek to sell for diversification sake.

But in January 2016 the secondary market was seen to exhibit greater equilibrium, in terms of buyers and sellers, which helped to alleviate price pressure and resulted in a more balanced month of supply and demand, with each side being met much of the time.

“Active start to the year for the Secondary Catastrophe Markets. Flows were strong from the start of January in both long and short duration credits. In a very positive sign for the market there was a healthy mix of buyers and sellers stabilizing prices unlike some past months where it seems we are only going in one direction,” explained Craig Bonder, Managing Director at AK Capital.

Zurich, Switzerland based catastrophe bond and ILS fund manager Plenum Investments concurred, saying; “In the previous months, sellers of CAT bonds were in a majority. In January, the ratio of buyers and sellers was more in equilibrium and there was a lively secondary market with a balanced mix of bids and offers across a range of CAT bonds.”

Plenum also noted the “stabilising effect” that the greater balance in supply and demand resulted in, providing enough liquidity to help investors and ILS managers to achieve their portfolio rebalancing goals.

Bonder echoed this, saying that the equilibrium seen in the secondary cat bond market in January; “Provided ample liquidity for all market participants to rebalance portfolios and or raise cash.”

ILS funds were largely treated to a positive monthly return from their catastrophe bond portfolios in January 2016 as a result of the greater pricing equilibrium. However with the peak of the European windstorm season now passed, there is an expectation that the seasonal returns from that peril will slow and could affect the return potential of cat bonds for a few months.

Also read:

Cat bond market liquidity rises in December on portfolio rebalancing.

Cat bond deal-flow stimulates greater secondary liquidity in November.

Secondary cat bond prices moderate in October.

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