Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Reduced secondary market catastrophe bond prices an opportunity for new investors


Regular readers of Artemis and those actively involved in the catastrophe bond and insurance-linked securities market will be fully aware that secondary market cat bond prices have been sliding in recent months. We’ve written many articles in recent months which references this downward pressure on cat bond price returns which has been a feature of the market since last October. Prices have now slid to such an extent that we are beginning to hear talk of the opportunity this is presenting to investors who are new to the ILS and cat bond space.

The extremely active last quarter of 2011 and first quarter of 2012 have seen a record amount of primary market catastrophe bond issuance. This has been the major cause of the depression of secondary market cat bond prices as investors have looked to the primary market to deploy capital in recent months. Essentially interest dropped in secondary cat bonds, except for where they have been required to maintain diversification within an investment portfolio or ILS investment fund.

The reduced prices of secondary market cat bonds and the reduced interest of the main investors in the market has given an opportunity to new investors, who may have been sitting on the sidelines of the cat bond and ILS space waiting for the right moment, to deploy their first capital into the sector. We’ve spoken to a number of investors who have backed this up and have recently made small investments in the cat bond space in secondary deals. They cited the low prices as a reason for now being the time they chose to invest. These aren’t large deployments of new capital by any means, however it is bringing new capital and interest to the space at a time of growth which is encouraging. New capital and new investors will be required if the cat bond and ILS market is to achieve any sustained period of growth over the next few years.

Zurich based ILS investment manager Plenum Investments has also noticed that secondary cat bond prices are at a point which could attract interest, as they say that they have noticed buyers turn back from the primary to the secondary cat bond market as prices there have become very attractive.

Value in secondary cat bond prices should help to sustain the price returns from dropping steeply even if primary issuance continues to be high and could be a contributing factor to overall market interest from investors and eventually growth.

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