Swiss Re Insurance-Linked Fund Management

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Higher primary cat bond issuance drives secondary trading in March 2017


Secondary trading activity of catastrophe bonds accelerated in March 2017, as the primary issuance market and pipeline of new deals picked up and investors and ILS fund managers used the marketplace to adjust portfolios and accommodate new deals.

After February 2017 saw demand pushing secondary cat bond trading activity higher, March saw investor demand beginning to be satisfied, resulting in another uptick in trades across secondary desks.

“We saw four new issues, totaling approximately $1.145 billion issued and priced in March with another four or so deals totaling over $1 billion in the works,” Craig Bonder, Managing Director at AK Capital said. “As is usually the case in this sector the primary issuance helps drive the secondary trading as participants rebalance portfolios, overweighting and underweighting new and old issuances accordingly.”

Activity was particularly significant in terms of the number of cat bond names being traded, which will have provided some welcome opportunities for those building portfolios in the space and looking for diversification.

Bonder continued; “This month was a prime example of that as the secondary market saw over forty individual credits trade on Trace, many of these names trading multiple days though out the month and in size.”

Interestingly, Bonder noted that some secondary prices began to slide a little during March, both due to the amount of supply coming to market and seasonal effects, the first time this has been witnessed for a little while.

“What also was of interest was watching names trade down in price for the first time in quite some time as seasoning and supply widened out names vs months and months of limited supply and higher prices,” he explained.

With primary cat bond issuance also higher this month, it will be interesting to see whether this widening continued through April.

Swiss based ILS and cat bond investment manager Plenum Investments also explained; “The supply and demand in the secondary market also became more balanced, which caused bond prices to decline as the seasonal spread widening effect outweighed the demand-driven upward pressure on prices.”

Plenum also noted “increasing pressure on prices for US hurricane bonds, as we get nearer to the start of the hurricane season” another seasonal factor that will be affecting some portfolios at this time of the year.

With almost $1.3 billion of cat bonds already issued in April and another $1.4 billion+ in the pipeline for the coming weeks, catastrophe bond investors and fund managers will turn to the secondary market for access to liquidity and trading opportunities.

As issuance rises the result is typically greater secondary liquidity, a trend that helps ILS investors to recognise the real benefits of securitized insurance risk assets.

Also read:

Demand pushes secondary cat bond prices higher in February 2017.

Fairly active secondary market in Jan 2017, demand overhang remains.

Very active December secondary cat bond trading closes out 2016.

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