Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

Lack of new cat bonds makes secondary trading opportunities elusive in January


Lower than expected issuance levels of new catastrophe bonds and insurance-linked securities so far this year has made secondary cat bond trading opportunities elusive, according to one ILS fund manager. Investment managers are currently awash with excess cash, thanks to new capital inflows and money returned from maturing cat bonds. But this excess cash could only be partly deployed in January due to a lack of new issuance and less trading opportunities in the secondary market.

So far the cat bond market in 2013 has been quiet with just two new transactions in the year to date, with one, Skyline Re Ltd, being a privately placed cat bond and the other, Vitality Re IV Ltd. , offering health insurance risk transfer. Compare this to the start of 2012 when we saw almost $800m of risk come to market in January alone, 2013 has so far totalled just $211m from the two deals in January.

At the beginning of 2012 the secondary cat bond market was characterised by sluggish trading and price movements because primary issuance was so high investors were holding back capital for new deals. Any trading that did occur in early 2012 tended to be for portfolio optimisation purposes and price returns of outstanding cat bonds slid as the focus moved away from the secondary market.

At the beginning of 2013, investment managers funds have experienced strong inflows of new capital again and managers also have excess cash from a number of maturing cat bonds which have returned their principal. However primary issuance has not been sufficient to satisfy demand and this has had a knock-on effect on the secondary market.

According to Swiss based insurance-linked securities (ILS) fund manager Plenum Investments the lack of primary deals has resulted in very few offerings in the secondary market in January. Investors have been doing their best to maintain investment levels and deploy as much capital as possible, but the opportunities just haven’t been there as investors hold onto positions they might otherwise have relinquished in favour of new cat bonds.

With such a small amount of new issuance and almost no secondary cat bond trading Plenum said that secondary cat bond prices in January followed typical seasonal patterns. U.S. hurricane cat bonds lost on average 1% during January while European windstorm bonds gained about 0.6%. Risks that are not seasonal, such as U.S. and Japan quake, remained flat.

Seasonal spread tightening on outstanding European windstorm cat bonds helped Plenum’s ILS fund to a 0.31% return for the month of January, in its USD share class. Plenum said that it expects that effect to continue through February and March as the two months account for around a quarter of the years European windstorm risk.

Plenum said that it expects primary market cat bond issuance will pick up over the coming weeks and that it will seek to deploy the cash it now holds, after nearly 5% of its investments matured, into suitable new opportunities as and when they become available.

Until the primary cat bond market picks up the pattern of a sluggish secondary market is likely to continue and investment managers may find themselves attracted to private ILS or ILW deals should any be offered. For sponsors, issuing a catastrophe bond now could be beneficial as with so much cash on hand and an appetite to invest it among fund managers, any new deal would be very well received and may be able to achieve extremely attractive pricing.

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