Secondary trading in the catastrophe bond and insurance-linked securities (ILS) market picked up in the first-quarter of 2016 following a less active close to 2015, however, Q2 saw trading volumes decrease again owing to reduced primary issuance, according to Aon Benfield.
Global reinsurance broker Aon Benfield has revealed that catastrophe bond & ILS secondary markets were less active in the second-quarter when compared with Q1, as trade volume declined by more than 32% to $245.23 million from 218 trades, according to FINRA’s Trade Reporting and Compliance Engine (TRACE).
It’s important to stress that this is an underestimate of total market trade volume as FINRA’s TRACE excludes foreign (non-U.S.) trades, trades by non-U.S. broker deals, and trades in bonds rated below investment grade are capped at $1 million.
“Given lower primary issuance in cat bonds it is also not surprising that secondary trading levels in the quarter were lower on a quarter-on-quarter comparison,” said Paul Schultz, Chief Executive Officer (CEO) of Aon Securities.
Compared with the first-quarter of 2016 the dollar trade volume of reported trades declined by a little over 20%, which the report notes is in part owing to a lack of primary issuance in the quarter, with only five new bonds issued.
Artemis discussed previously how an active Q1 for secondary trading in the global cat bond and ILS space, on the back of a reported $6 billion in trades during 2015, highlighted market liquidity and investor comfort within the space and the potential for additional liquidity through 2016.
As highlighted by the Artemis Q2 2016 Catastrophe Bond & ILS Market Report, the second-quarter of this year saw issuance levels decline to $1.624 billion, the first Q2 since 2011 that issuance has failed to reach $2 billion, which as Schultz underlines, suggests a less active secondary trading market.
A decline in new issuance combined with a reported $2.9 billion of maturities in the second-quarter also saw prices in the secondary market continue to increase, said Aon in its Q2 2016 ILS market update.
“Investors continued to utilise the secondary market to redeploy available capital, resulting in more buyers than sellers,” a trend that the reinsurance broker says remained throughout the three months, driven in part by the fact that no deals came to market in April.
The only exception to the above was Gator Re Ltd. (Series 2014-1) explains Aon, which saw its price decline substantially to 76 cents in the middle of June before bouncing back to 80.5 towards the end of the month, as part of the bonds aggregate retention was eroded by thunderstorm losses.
As evidenced by Q1 and Q2, higher levels of issuance tends to result in higher trading volumes as investors appear keen to free up capital and redeploy into new and diversifying bonds, highlighting the significance liquidity in the secondary market gives the investor base.
However, when issuance levels decline so to does the volume of trading in the secondary market, and with demand from investors remaining high the lack of transactions tends to translate to a hike in prices.
“Many investors have capital to deploy which should continue to lead to further secondary price increases,” said Schultz.
The report provides some insight into which transactions traded the most in the quarter, revealing that both Everglades Re Ltd. (Series 2014-1) and Acorn Re Ltd. (Series 2015-1) traded more than 10 times in the quarter.
The Everglades Re deal, which is the largest catastrophe bond ever issued in the history of the market at $1.5 billion, as shown by the Artemis Deal Directory, traded heavily in the final days of the quarter as prices reduced slightly, in line with the U.S. hurricane season, says Aon.
Divergent to trading seen with Everglades Re, the report notes that Acorn Re was used throughout the quarter as a portfolio diversifier, achieving stable price increases across the three months, rising from 101.25 to 103.25.
“Similar price increases were achieved for other portfolio diversifiers, as strong demand endured throughout the quarter for earthquake and non-U.S. bonds,” says the report.
Interestingly, the report explains that despite the Class A tranche of Vitality Re V Ltd. (Series 2014-1) notes only trading six times in Q2, the dollar volume of trades almost amounted to 9% of the overall trade volume in the quarter, at $21.5 million.
“While the primary market is not typically as active during the third quarter due to the U.S. hurricane season, our firm does expect an active second half of 2016. Overall, we believe the market will continue to be attractive for sponsors that choose to incorporate alternative capital,” concludes the report.
It will be interesting to see the volume of primary catastrophe bond and ILS issuance that comes to market in Q3, a typically quiet period for issuance that in turn could see another quarter of reduced secondary market trading.
However, investor comfort and sophistication is growing all the time in the space, and with demand from the investor base remaining high, it continues to be an attractive marketplace for sponsors and investors alike.