Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Investors lock in gains, as demand drives cat bond prices in May


Insurance-linked investors and catastrophe bond fund managers took advantage of the continued unseasonable rise in secondary market cat bond prices, to lock in investment gains, as investor demand drove them higher again in May 2016.

The secondary trading market for catastrophe bonds saw another month of relatively active buying and selling in May, as investors both adjusted portfolios in advance of the upcoming mid-year reinsurance renewals and sought to lock-in gains made on bonds which have continues to see rising prices.

As a result it was another month of strong total returns for the catastrophe bond market and pure cat bond funds, as secondary prices refused to bow to seasonality and kept moving higher.

Whenever the market moves unseasonably, in terms of price, it offers investors a chance to lock-in some gains made and can free up marks for other investors that are mandated to deploy capital into 144A cat bond securities.

As a result there can be profits to be made, as there have for the last few years been buyers in need of liquid securities in ILS and these investors and managers are often pleased to pick up bonds even at higher prices.

Craig Bonder, Managing Director at AK Capital, commented on some of the trends seen across his ILS trading desk in May; “Another month of strong total returns for the Catastrophe Bond market with prices refusing to heed to seasoning and go lower.

“Although May new issuance helped satisfy some of the market demand, it didn’t offset the May maturities and the secondary market remained well bid and overall a sellers’ market.”

Following on from the record first-quarter for catastrophe bond activity, which failed to meet investor demand despite the records set, the second-quarter began more slowly and some investors continue to clamor for more cat bond issuance to come to market.

As in previous years, this affects the supply/demand balance of the insurance-linked investments market which can result in unseasonable price movement, price inflation and demand far outstripping supply.

And demand certainly seemed high in May, with investors ready to pick up the cat bond notes sold by those looking to cash-in on price rises.

“Offerings tended to be quickly placed and purchased. As such many sellers took advantage of this secondary demand to lock in gains and portfolio re-balance,” Bonder explained.

Zurich based ILS and cat bond investment manager Plenum Investments also noted similar trends in May, saying; “Investors demand continued to outpace supply. The secondary market remained well bid as investors were seeking to deploy capital and consequently the CAT bond market delivered another strong month despite the approaching hurricane season.”

Of the ILS fund managers we have spoken with during May, we know that a few have been selling some U.S. hurricane cat bond positions at higher pricing and found there have always been buyers available, even with the hurricane season approaching.

For those investors picking up hurricane exposed cat bonds at unseasonably inflated prices just before the start of the season, a watchful eye on the tropics will be required. With yield to maturity eroded slightly, due to price rises, it’s likely these are the kind of investors with mandates to acquire liquid cat bond securities and willing to do so even at higher prices and at the peak exposed time of year.

It will be interesting to see how the cat bond market’s pricing reacts to the hurricane season as we proceed through it in 2016.

Also read:

Cat bond investment demand drives prices higher in April.

Limited secondary cat bond trading in March sees prices rise.

Secondary cat bond market activity “mixed” in February.

Register today for ILS Asia 2023, our next insurance-linked securities (ILS) market conference. Held in Singapore, July 13th, 2023.

Artemis ILS Asia 2023 - Insurance-linked securities conference in Singapore

Get a ticket soon to ensure you can attend. Secure your place at the event here!

Print Friendly, PDF & Email

Artemis Newsletters and Email Alerts

Receive a regular weekly email newsletter update containing all the top news stories, deals and event information

  • This field is for validation purposes and should be left unchanged.

Receive alert notifications by email for every article from Artemis as it gets published.