Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Fairly active secondary market in Jan 2017, demand overhang remains


The secondary market for trading in insurance-linked securities (ILS) and catastrophe bonds got off to a relatively active start in January 2017, but appetite remains strong and the demand overhang persists, according to market participants.

Secondary cat bond market liquidity has been picking up in recent years, as the number of investors in the space grows, more traditional asset managers begin to pick up select cat bond opportunities and the demand for the ILS asset class continues to grow.

However with primary cat bond supply not sufficient to meet investor demand still, the secondary market faces the same issue which results in positions seeing strong bids, but not always enough paper coming to the trading desks to satiate demand.

In January 2017, after a very active December of secondary trading, the month saw a fair level of trades completed.

Craig Bonder, Managing Director at AK Capital, said that 40 cat bond names were recorded as having trades on the FINRA Trace system in January 2017, although the month began a little more slowly.

“After a few days to come back from the holidays the secondary market began to take off and had a fairly active month to start 2017,” Bonder explained.

“Although it still feels buyers were outnumbering sellers for the most part we were able to see a meeting of the minds on numerous names as clearing levels went higher,” he continued.

ILS investors and fund managers are taking advantage of the clear appetite for paper in some cases, Bonder said, as they continue to find liquidity that enables them to make gains on certain positions and free up capital to reallocate it into new opportunities.

That’s one of the benefits of the larger ILS investor base with more trading investors in it, that we see today. It means liquidity can often be found at the time that ILS funds and investors need it to release capital from positions held.

Zurich, Switzerland headquartered ILS and catastrophe bond investment manager Plenum Investments also noted a relatively active month, saying; “Although there is still a significant demand overhang in the market, the buying interest was often met by sellers as clearing prices moved higher and investors were realizing some gains.”

The high levels of demand continue to swing prices though, according to Plenum Investments, who said that; “In this environment, seasonal price fluctuations were dominated by the effects of supply and demand.”

The ILS manager also said that it anticipates continued strong demand for paper, which will also help to put upwards pressure on pricing that could help the returns of catastrophe bond funds even if primary issuance is not meeting demand at this time.

The effects of seasonal pricing from the European windstorm peril will also begin to wane over the coming weeks, as that season moves towards its close. However with the amount of European windstorm risk in the cat bond market lower than in previous years, due to the very low price of reinsurance covers, this effect have lesser influence in 2017.

Also read:

Very active December secondary cat bond trading closes out 2016.

Short-dated cat bonds lead November 2016 secondary trading.

After slow start, cat bond trading picks up in October.

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