The secondary market for outstanding insurance-linked securities and catastrophe bonds showed a dramatic tightening of prices in February, according to Swiss based investment manager and private bank Clariden Leu in their latest fund performance report. This is notable for this market, say Clariden Leu, given that it is generally quite stable except for when responding to a catastrophe event or anything that could be interpreted as a threat (such as model changes).
This will come as no surprise to our regular readers, who will have seen us document this through the month in our regular pieces on the performance of cat bond indices (recent articles on this topic can be found here and here), but it’s always interesting to hear the perspective of market participants especially when they offer a deeper level of insight.
Negative price movements that have become a trend over the last few months and were particularly steep in February have been due to the high volume of new cat bonds being issued at higher spreads. This has caused demand for outstanding cat bond and ILS notes to decrease, particularly those offering lower returns. Clariden Leu notes that investor demand for outstanding notes is subsiding as investment managers adjust portfolios to make room for the new offerings that have come to market.
Clariden Leu share a really interesting graph and price table which shows the price movements and decrease in market value of some specific outstanding catastrophe bonds over the course of the month of February. They note that this price movement has affected nearly all outstanding ILS, regardless of what peril or region they cover. Interestingly only extreme mortality and life/health ILS have remained mostly unaffected by this trend, perhaps unsurprising given there haven’t been any new cat bonds or ILS exposed to those risks in the last couple of months. The graph and table from Clariden Leu’s report can be found below.
It’s interesting seeing the different cat bonds and how much each has dropped. Lodestone Re and Johnston Re saw the biggest drop out of these four deals, which is unsurprising given that they cover North Carolina hurricane in the case of Johnston Re and U.S. hurricane and U.S. earthquake in the case of Lodestone. These are all perils which have seen a lot of new issuance in recent weeks and so don’t offer much in the way of diversification right now. Calypso Capital is a European windstorm bond and Kizuna Re is a Japan typhoon bond, so they can still offer a certain level of diversification so demand for them (while still low) is likely higher than for U.S. risk exposed cat bonds.
Clariden Leu say that prices could remain volatile over the next few months as more transactions come to market and managers continue to adjust their portfolios to accommodate them. However they don’t anticipate any negative price movements of the magnitude seen in February and expect cat bond marks to begin to stabilise. This is already being evidenced by the secondary market cat bond indices which have slowed their decline so far in March.
Clariden Leu remain very optimistic about the pipeline for new cat bond and ILS deals for the coming months and continue to work to optimise their funds portfolio make-up to optimise the diversification and performance of the funds. On the high issuance currently being seen and projected to continue through the second quarter they note that it will be interesting to see how much firm investor interest remains available for new ILS and cat bond deals and whether new investors will be attracted to the asset class due to the premium increase.
In other news, Clariden Leu’s ILS fund business has been sold to LGT Group, the change of ownership is due to take affect in the second quarter, but investors should notice no change in service.