Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

New catastrophe bonds in March helped secondary market liquidity


After a sluggish start to the year, March saw a number of new catastrophe bonds come to market and this primary issuance helped to take some of the pressure off secondary market trading. The year began with low primary issuance, combined with high demand for secondary cat bond marks, resulting in unseasonal price movements and a difficult trading environment for some. The resurgence of primary cat bond market activity has eased those secondary market conditions somewhat.

The welcome launch of a number of new catastrophe bond deals during March has helped to take the pressure off the secondary cat bond market. In total six new catastrophe bonds launched during the month of March, led by Tar Heel Re Ltd. (Series 2013-1) which closed at $500m, Merna Re IV Ltd. (Series 2013-1) which reached $300m, Everglades Re Ltd. (Series 2013-1) at $250m, Caelus Re 2013 Ltd. (Series 2013-2) at $320m, Bosphorus 1 Re Ltd. which has yet to complete but upsized last week to $250m and Pelican Re Ltd. (Series 2013-1) which is still marketing at $100m as we write this.

In total these six deals have brought at least $1.72 billion of new risk capital opportunity to investors who have been seeking to deploy new inflows of capital and the cash they have been holding from inflows and maturity of older cat bond deals. This has come as a welcome relief to some investment managers who had been holding considerable cash in their funds, sometimes approaching the limits that they had set in their funds terms and conditions.

According to Swiss based insurance-linked securities (ILS) fund manager Plenum Investments the increase in new cat bond issuance had a positive effect on the secondary market as it triggered a need for portfolio rebalancing among ILS investors. This led to purposeful trading activity in the secondary market and as a result had the effect of increasing secondary market liquidity, something which will have been welcomed by all investors.

However, thanks to the heavy inflows of new third-party capital into the ILS, cat bond and reinsurance space, demand for cat bonds still exceeds supply, according to Plenum. As a result of this Plenum saw spreads continuing to tighten across almost all perils and regions in March, with the sole exception of Japanese typhoon risk, and the unseasonal pricing trends continue.

This continued tightening of secondary cat bond spreads will result in another very positive month for catastrophe bond focused investment funds once March returns are all tallied. The start of 2013 has seen cat bond focused investors benefit from strong gains triggered by the unseasonal tightening of cat bond marks thanks to the extremely high demand for secondary positions.

Despite the performance bonus that investment managers have received, due to the slow start to the primary cat bond market causing secondary gains this year, they will be hoping that primary issuance remains strong. Investors ideally need the primary cat bond pipeline to remain strong through to the start of the U.S. hurricane season, enabling them to deploy fresh capital and obtain balanced portfolios through easier secondary market conditions. There is plenty of capital available on the sidelines of the ILS market still, ready to support continued strong issuance as we move forwards.

Market rumours suggest that we should see one or two more cat bond deals launch before the end of April and that some of the maturing cat bonds may be repeated during May. We’ll keep you updated as new cat bond transactions come to market.

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