Once again the last seven days has seen a number of short-dated, soon to mature catastrophe bonds, which offer higher yields than recent primary issuance, traded in the secondary market, as investors continue to be attracted to these opportunities.
Short-dated cat bonds have seen an increasing amount of trading since the last quarter of 2014, as the $5 billion or so of anticipated maturities in the first-half of 2015 provided some investors with an opportunity to add yield to their portfolios, sometimes for an effective reduction in risk.
With catastrophe bonds issued during 2014 largely having a low coupon yield due to reduced pricing across catastrophe risks, compared to the majority of the scheduled maturities, investors have been attracted to these notes as an investment to hold to maturity.
This has offered a number of ways to profit, both for buying investors and also for those selling these positions.
Firstly the opportunity to swap out recent issues with lower yields, for short-dated cat bonds sometimes with a coupon twice as high, has been a very attractive option for those investors which are largely focused on catastrophe bonds. They have even found buyers for the lower-yielding bonds in some of the beta type cat bond plays or the larger investors who need to maintain a liquidity ratio in their portfolios, alongside their collateralized reinsurance books.
Secondly, some of these short-dated cat bonds are largely off-risk at the moment. Many of them contain exposure to U.S. wind, but with it being off-season that peril is not a threat. So even if the other perils included are on-risk the overall risk profile of many of these cat bonds is lower than it was during the 2014 hurricane season, which has made them increasingly attractive to buy and hold.
As we explained last week here; “There is a definite trend emerging of investors offloading short-dated positions in favour of allocating capital either to new cat bond issues or into collateralized reinsurance and private ILS deals. Those allocating to new cat bonds likely require the liquidity offered by a security, while those shifting allocations to private deals are often searching for either diversification or a higher returning asset.”
You might think that sellers of these short-dated catastrophe bonds would be hard to find, but it would appear that some investors have been more than happy to off-load vintage deals. Some of these sales will have been as a result of a need to diversify portfolios to accommodate newer, longer-dated cat bonds that were issued in Q4. Still more of the sales will have been supported as some investors increasingly sought to put capital into collateralized reinsurance deals at the January renewals, thus needing to offload some older holdings.
Some sellers will even have made a profit on these positions, perhaps enough of a profit to make selling the higher-yielding bonds worthwhile without the need to diversify or switch capital into other assets. Some ILS investors will have bought these notes at par or even below at times. Lately of course the majority of catastrophe bonds have been priced above par, meaning that a chance to profit on a position you’ve held for some time could be an attractive option.
Trading was a little lighter in the last week, compared to the weeks ending the 11th and the 18th January, likely due to us getting a little further beyond the renewals and the need for portfolio changes becoming less important. However, with two new catastrophe bonds having launched in the last week, Catlin’s $200m Galileo Re Ltd. (Series 2015-1) and SCOR’s $150m Atlas IX Capital Limited (Series 2015-1), with more likely to come soon the need to optimise portfolios will again become more important and stimulate brisker trade.
Once again, trades recorded on TRACE in the last seven days reflect a lowering of price levels than the previous time these bonds were traded. This continues to reflect seasonality changes, but also perhaps the widening of risk spreads, discussed here, which could signal a gradual stabilisation of the premium environment.
Here is a list of the catastrophe bonds that traded last week, where data is available from FINRA’s TRACE system, and their most recent prices:
Blue Danube Ltd. (Series 2012-1) – Class A notes traded on 20th Jan at 100.45, the same price as the last trade on the 14th, coupon 6.04%. Class B notes traded on 20th Jan at 101.4, down from 101.45 on 14th Jan, coupon 10.79%. Matures April 2015.
Queen Street V Re Ltd. – Traded at 100.7 on 21st Jan, down from 101 on 15th Jan. Coupon 8.505%. Matures April 2015.
Queen Street VI Re Ltd. – Traded at 100.9 on 21st Jan, down from 101 on 12th Jan. Coupon 10.383%. Matures April 2015.
Tar Heel Re Ltd. (Series 2013-1) – Traded at 105.2 on 23rd Jan, down from 106.08 on 18th Dec 2014. Coupon 8.533%. Tar Heel matures in May 2016.