It’s that time of year when the secondary trading market for catastrophe bonds tends to see volumes rise in short-dated names, as insurance-linked securities (ILS) fund managers and investors look to offload cat bonds that are maturing soon to free up capital for reinvestment.
According to FINRA’s Trade Reporting and Compliance Engine (TRACE) system there were more than 30 different catastrophe bond names that traded during the month of November, with a number of these trading multiple times, so liquidity was reasonably high during the month.
It’s important to remember that this is not all trades that occurred, as cat bond trades facilitated by a European broker desk will not have been reported in TRACE. So the secondary cat bond market saw a relatively busy November, as some trades would have been undertaken across European desks that did not involve a report on the transaction to FINRA.
“The month of November started off with a flurry of secondary activity as the October lull broke and this continued throughout the month with well over 30 names having traded according to TRACE,” Craig Bonder, Managing Director at AK Capital, said.
But as is often seen at this time of year a majority of the cat bond names traded were short-dated, or approaching maturity, which is typical at this time of the year when cat bond and ILS fund investors are anticipating brisker issuance of new transactions in the first-quarter of the new year.
“One must note that over half of these names have 2016 or 2017 maturities highlighting the large amount of short dated trading that took place,” Bonder said. “This is fairly typical at this time of year as many investors post US wind season look to increase duration and or build up cash to invest in existing longer dated names or expected new issuance.”
The fact that primary issuance was slow in October but picked up in November likely also helped to stimulate the more rapid start to secondary cat bond trading activity in the month, according to Zurich headquartered ILS and catastrophe bond investment manager Plenum Investments.
Looking ahead, seasonality changes the pricing expectations for some catastrophe bonds as we move from one peak peril season into another.
“Now that the hurricane season is over, prices of hurricane bonds will start their seasonal decline. This development should be counterbalanced by gains on Europe storm bonds as we move into the peak months of the European winter storm season,” Plenum Investments explained.
With primary catastrophe bond issuance in December looking reasonable at in excess of $950 million so far and one issuance of $500 million already slated for early January 2017, the secondary market will likely see a decent level of activity in December as well.
Also helping to stimulate secondary cat bond trading activity in December will be the forthcoming January reinsurance renewal, as ILS funds switch capital from cat bonds into collateralised reinsurance structures and vice versa in time for the key renewal.
As a result the end of the year almost always sees a pick up in cat bond trading liquidity, which is tending to increase each year both due to the size of the market and also the growing number of ILS investors and investment fund allocating capital to catastrophe bonds.
Liquidity aside, there remains a need for more primary catastrophe bond issuance to satisfy the true levels of investor demand. If primary issuance supported further growth in outstanding cat bonds we would see a corresponding increase in secondary liquidity, something that would be welcomes by investors and brokers alike.