November was the first month since February with no new catastrophe bonds completing, giving investors a lull before the inevitably busy end of the year and contributing to a modest months trading in the secondary market for cat bonds.
While primary issuance dried up the marketing was just beginning and a number of deals were launched before the end of November. Investors in insurance-linked securities (ILS) had the latest USAA sponsored Residential Reinsurance 2013 Ltd. (Series 2013-2) and another AIG sponsored diverse cat bond Tradewynd Re Ltd. (Series 2013-2) to turn their thoughts to in November.
The forward pipeline began to look busier for December as well, as has been evidenced by the launch of three new deals (Loma Reinsurance (Bermuda) Ltd. (Series 2013-1), VenTerra Re Ltd. (Series 2013-1) and Queen City Re Ltd. (Series 2013-1)) in the last week. With two deals being actively marketed at the end of November and a number more eagerly awaited, some investors took the opportunity to balance portfolios in November which helped to stimulate some secondary trading opportunities.
Zurich, Switzerland based ILS investment manager Plenum Investments said that as demand for cat bond paper continues to outstrip supply and there were no new deployment opportunities secondary trading remained modest in November. Outstanding cat bond prices were on average flat or slightly negative across all risk classes for the month, the ILS manager said.
November is typically one of the lowest contributing months to its cat bond fund returns, said Plenum, as the spread tightening on U.S. hurricane exposed bonds is all but over and the spread tightening has not begun in earnest on European windstorm exposed cat bonds yet.
Craig Bonder, Managing Director and Head of ILS Trading at AK Capital, commented that November saw good returns across the market as the ILS market remained loss free for another month and demand for risk remained high. Price rises were more subdued in November, Bonder explained, as the market had already priced in the mild hurricane season.
However, despite prices staying largely flat, Bonder said that months like November, with mild price rises and steady coupons, earn investors the strong yields they are looking for from an asset class such as ILS.
Bonder said that his cat bond and ILS trading desk saw good activity during the month; “With hints of new issue on the horizon we saw some portfolio rebalancing and mixed flows as investors looked to put funds to work while other participants were happy to take gains at these levels.”
With the pipeline having picked up again and a number of new deals come to market, it looks like some excess investor demand will be mopped up as we move towards the end of the year. This should help to stimulate a greater level of secondary catastrophe bond trading in December, as investors adjust portfolios to accommodate new deals.