The month of March saw limited activity in the secondary trading market for catastrophe bonds, as new issuance of $565m of more broadly marketed cat bonds and a $300m club deal that wasn’t widely marketed, failed to stimulate much demand for portfolio adjustments.
It’s perhaps a sign of the catastrophe bond market and ILS investors growing maturity, that despite March being the busiest month of what we now know to be a record first-quarter for catastrophe bond activity, the $865m of risk capital issued was not sufficient to stimulate significant secondary trading levels.
Swiss ILS and cat bond investment manager said that; “Secondary trading in March continued where it left off in February with slow market activity as no major rebalancing effort was needed from investors because of the lack of activity in the primary market.”
However prices did not decline significantly, even on the risks that would be considered seasonal at this time of year, according to those in the trading market.
Demand seems sufficient to buoy prices so far this year, at least much more so than seen of late, likely helped by some new catastrophe bond investment fund strategy launches as well as what has been termed some “considerable” increases in assets at larger ILS fund managers.
This is helping to ensure that while secondary trading may not be brisk, it has been consistent in March, with plenty of demand for positions helping to ensure that prices remained relatively stable.
“The continued demand for investments supported prices of the outstanding bonds, which showed smaller seasonal declines than what we would usually expect during this time of the year,” Plenum Investments explained.
In fact catastrophe bond funds, such as that managed by Plenum, seem to have had largely positive months in March. As we move through the year, the influence of some funds allocating to higher risk/return cat bonds over the winter months will also likely boost returns, particularly as the seasonality of U.S. wind kicks in.
Craig Bonder, Managing Director at AK Capital, explained how market forces affected secondary cat bond prices in March, with what seemed to be “a fairly slower month for secondary trading than years and months past” resulting in investors undertaking “less portfolio rebalancing, searching for where to put capital to work and clearly less willing to part with current positions.”
Bonder said that this is a little unusual at this time of year, when we’d expect to see more pressure on secondary pricing. What’s even more surprising is that we see this in a time when the market has hit another record level of issuance and outstanding.
There is a chance that the club like nature of State Farm’s Merna Re Ltd. (Series 2016-1) cat bond, which meant it was only marketed to a few of the larger ILS fund managers, meant that more broadly in the market smaller fund managers did not need to rebalance as much as they have in prior years.
“This happens at times in this market where there is a dearth of assets for sale causing prices to inch higher and higher each week and in this case fight against the seasonality headwinds that should have been lowering prices overall” Bonder continued. “As a result the month produced a strong total return but limited trading.”
But activity picked up almost straight away, possibly as a response to the impending April reinsurance renewal when ILS fund managers deploy collateral to back renewal transactions.
Bonder noted; “This can change very quickly however and we have already started to see activity pick up this week.”
With no catastrophe bonds currently being marketed as primary issuance, April has started off quietly which may result in another quieter month in secondary trading terms. We’ll have to wait and see whether things pick up, as there are rumours of a couple of primary cat bond deals nearing readiness to begin book-building.