Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Strong catastrophe bond issuance stimulates secondary portfolio rebalancing in April


Liquidity increased in the secondary market for catastrophe bond and insurance-linked securities notes in April, helped by continued strong primary cat bond issuance stimulating portfolio rebalancing among investors looking to accommodate new deals. This trend began in March, as we wrote a month ago here, but liquidity increased in April as the need to adjust portfolios for diversification and rebalancing purposes grew.

It’s interesting to note that in early 2012 when primary catastrophe bond issuance was high the secondary market seemed to suffer and liquidity was scarce creating a decline in outstanding cat bond price returns as investors focus moved to accommodating primary deals. 2013 started slowly but as issuance picked up the secondary market, while not exactly brimming with activity, has seen more liquidity than a year earlier.

A number of investment managers we’ve spoken with put this down to the growing amount of outstanding cat bonds, meaning there are more notes available in the market than ever before, but also to there being more investors as well some of whom are only beginning to build portfolios of cat bonds and so need to ensure their holdings are balanced.

So when a surge of primary cat bond issuance occurred through late March and April, many investors were juggling positions, buying some new issuance and selling some secondary notes, in order to keep their portfolios diversified and balanced in advance of the U.S. hurricane season.

$1.52 billion worth of new catastrophe bond notes came to market in April, while more launched during the month but completed in May or have yet to complete. The mix of perils issued and completed in April included U.S. earthquake, U.S. hurricane, North Carolina hurricane and Turkey earthquake risks and the transactions offered a mix of indemnity and parametric triggers. Details on every transaction can be found in our catastrophe bond Deal Directory. April 2013 cat bond issuance was 22% up on the $1.245 billion issued in April 2012.

Swiss based insurance-linked securities (ILS) fund manager Plenum Investments said that it noticed that all four transactions issued in April 2013 were significantly oversubscribed helping all to upsize, demonstrating the high demand for new cat bond transactions. On average deals doubled in size, although some upsized much more significantly while others only slightly. Also demonstrating the strong demand from investors for new cat bond issues, the average price drop from marketing to close was -9% from the coupon price guide mid-point or -15% from the price guide range upper level.

Plenum said that the increased activity in the primary cat bond market has helped to increase activity in the secondary market, as investors seek to maintain a balanced portfolio. Secondary cat bond prices have risen during April, but not by as much as during February and March. Secondary cat bond prices increased on average by 0.5% for U.S. hurricane cat bonds, by 30 basis points for U.S.
earthquake bonds and by 40 basis points for Japanese earthquake cat bonds. European windstorm and Japan typhoon cat bonds saw pricing remain flat in April.

Plenum itself saw 0.86% return for its ILS fund in April, helped by spread tightening on its catastrophe bond positions. We expect the average return of the ILS fund market to be high again for April, especially for funds with high cat bond exposure, as the price increase on secondary bonds will help many ILS investment managers to yet another positive month in 2013.

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