Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Low catastrophe bond issuance causes unseasonal secondary price movements


The lack of primary catastrophe bond issuance, combined with continued high demand in the cat bond asset class from investors, has led to some unseasonal price movements on outstanding cat bonds in the secondary market recently. With investment managers loaded with cash from new and continuing inflows to the ILS and reinsurance-linked asset class from investors as well as cash from some maturing cat bonds there is plenty of capital to put to work but not enough opportunities to do so.

Hence the secondary market has been a little dislocated of late in 2013. The high demand is making acquiring positions in secondary cat bonds elusive, as we reported a month ago. As the year continued with very little in the way of issuance in February, the continued high demand for secondary cat bond positions has led to some unseasonal, and perhaps unexpected, price movements according to one ILS investment managers latest update.

Swiss based insurance-linked securities (ILS) fund manager Plenum Investments discusses this atypical pricing situation in its latest update. Plenum said that the secondary market prices of outstanding catastrophe bonds have benefitted from the lack of primary cat bond issuance, as investors resort to attempting to deploy capital and obtain diversification through the secondary markets. This has resulted in a number of trades being executed at what Plenum called ‘very high bid levels’.

The demand for secondary cat bonds has been so high of late that it is now being reflected in mark to market gains across all perils and regions in the cat bond investment universe. Plenum said that even U.S. hurricane exposed cat bonds have seen some mark-to-market pricing gains in value, despite it being off-risk season when typical price trends would be flat to slightly down. European windstorm bonds, which experience seasonal gains in value at this time of year, have benefitted even more from the demand pushing their prices up further.

Of course these unseasonal price increases will be welcomed by those investors with large cat bond components to their funds or allocations to the ILS space. Funds dedicated to cat bonds will likely see very healthy returns in February thanks to secondary market price movements. We’ll update you when we have more information on average ILS fund performance for February.

Whether this trend will continue is hard to forecast, but there are now two new cat bonds being marketed (Tar Heel Re Ltd. and Merna Re IV Ltd.) which should go someway to soaking up a little of the excess demand for the asset class. However given the interest being shown by investors at the moment, and the upcoming raft of maturing cat bonds which will return further cash to ILS fund managers, we likely need to see a few more cat bonds come to market before it returns to normal seasonal movements.

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