Trading in the secondary ILS and catastrophe bond market during the first-quarter of 2016 was far more active than the final quarter of last year, with trade volumes increasing by more than 25% according to reinsurance broker Aon Benfield.
The reinsurance broker notes that during the first-quarter 311 insurance-linked securities (ILS) trades took place amounting to $307.75 million, according to FINRA’s Trade Reporting and Compliance Engine (TRACE).
It’s important to note that this is an undervalue 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.
When compared to ILS secondary market trades in the previous quarter, so Q4 2015, the volume of reported trades grew by more than 25% and, in terms of dollar volume reported trades increased by 10% in Q1 2016.
“This rise in trade activity was supported by freed capital being redeployed into the market following the maturing of 10 catastrophe bonds in Q1 2016, representing USD1.37 billion in limit,” explained Aon Benfield in its ILS Q1 2016 Update.
Artemis discussed recently the reported $6 billion of secondary market cat bond trades that took place in 2015, underlining increased liquidity and investor comfort in the space. So it’s positive to see an active start to the year and suggests the potential for further market liquidity and secondary trading activity in the coming months.
“Many investors attempted to utilize the secondary market to employ available capital, while others held steady in their positions. This resulted in more buyers than sellers, especially towards the end of the first quarter, which put upward pressure on catastrophe bond prices.
“Despite the lower supply of catastrophe bonds for sale, many investors were reluctant to increase bids, preferring to hold onto cash in anticipation of new primary business,” said Aon Benfield.
As evidenced in the Artemis Q1 2016 Catastrophe Bond & ILS Market Report, the first-quarter witnessed a record-breaking $2.215 billion of catastrophe bond and ILS issuance and, typically higher issuance levels results in greater secondary trade volumes.
High issuance levels appear to result in investors becoming eager to free up capital to redeploy into a range of new, diversifying cat bonds, underlining the valuable liquidity the secondary market gives investors.
Interestingly, the reinsurance broker states that FINRA’s TRACE reported that the trade count for Japanese earthquake exposed transactions increased by a significant 140% in Q1, when compared with Q4 2015.
Aon Benfield notes that this was driven by the anticipated early redemption of Kizuna Re II Ltd. (Series 2015-1), which saw investors seek “to maintain the diversity of their portfolios by buying into other Japan earthquake bonds on the secondary market.”
Beyond peril-specific trading activity, Aon highlights that Everglades Re Ltd. (Series 2014-1), Tar Heel Re Ltd. (Series 2013-1), Bosphorus 1 Re Ltd. (Series 2013-1), and Kilimanjaro Re Limited (Series 2015-1) Class D, are all cat bonds that experienced 10 trades or higher.
Following the realisation among investors that the pipeline for primary issuance was unlikely to meet demand, underlined by the increased acceptance and comfort of the asset class among capital markets investors, heavily traded bonds during Q1 witnessed downward pricing pressure until mid-quarter, explains Aon Benfield.
“As a result, an upward surge in pricing was witnessed in bonds actively traded in mid- to late Q1, such as Kilimanjaro Re 2015-1 D, which steadily increased in pricing from mid-February through the end of the quarter as trading activity increased,” said Aon Benfield.
Reinsurance broker Aon Benfield states that fourteen catastrophe bonds are set to mature in the second-quarter of 2016, with a prediction that this will put added negative pressure on bond spreads and cause secondary prices to rise.
However, with investor demand remaining high and the expectation that ILS and cat bond issuance will remain strong during 2016, it’s possible that further issuance and resulting liquidity could see the active secondary market trading volume witnessed in Q1 persist.