The secondary market for trading in catastrophe bonds and ILS proved to be a “valuable source of liquidity” in 2014, as investors sought to free up capital to invest in the year’s record new issuance, according to Aon Benfield Securities.
In its latest insurance-linked securities (ILS) and catastrophe bond market report, which Artemis covered in an article last week here, Aon Benfield Securities (ABS) discusses the secondary market trends it observed during 2014.
In 2014 the secondary cat bond market has supported investors and funds when they have needed to adjust their portfolios to make room for new issues.
ABS explained; “With a record amount of bonds outstanding in the catastrophe bond market and USD5.5 billion maturing in the first half of 2015, investors sought to make room for new deals in their portfolios by selling existing holdings in the secondary market.”
This led to a relatively active secondary market in 2014, which supported investors need for liquidity. This helped primary issuance, as without the ability to sell holdings of specific cat bonds some investors may have found it difficult to participate in the new issues.
“A relatively active secondary market enabled investors to access extra capacity and helped to further support the primary market,” ABS continued. “The secondary market for catastrophe bonds proved to be a valuable source of liquidity to investors looking to participate in the record volume of new issuances.”
As soon as the U.S. hurricane season came to a close in November 2014, the focus in the secondary cat bond market moved to trading hurricane exposed transactions with less than six months of their term left to run until maturity.
Institutional investors were attracted to these short dated notes as they were off-risk, but still offer attractive returns.
ABS explains; “Specifically, institutional investors sought to purchase these securities to achieve yields higher than would be realized by holding cash or cash-like instruments.”
The sellers of these bonds could easily reinvest the capital into new issue cat bonds, providing them with an easy way to swap out of positions that might otherwise mature at a time when there wasn’t a new issue readily available to invest in.
ABS said that this resulted in good liquidity for short-dated transactions, something which continues today, but “tepid” demand for longer-dated and lower-yielding securities. This is a trend we’ve noted in secondary trades logged with FINRA in January as well, that short-dated bonds tend to be trading, while longer dated aren’t so much currently.
“This reflected the lack of high-yielding and abundance of lower-yielding primary issuance that closed over the preceding 24 months,” ABS said.
Remote, or lower, risk cat bonds were readily available in the primary issuance market meaning that demand for them on the secondary market was muted. ABS noted that some investors seeking to rebalance portfolios struggled to attract bids on lower-yielding positions as a result.
With the high level of maturities in 2015 the secondary market should see a reasonable level of activity as investors seek to either soak up and hold the short-dated bonds, particularly those that are off-risk, or source higher-yielding alternatives to hold as vintage deals mature.