Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Strong secondary cat bond trading in November due to impending maturities


The month of November saw strong trading activity in the secondary market for insurance-linked securities (ILS) and catastrophe bonds as investors looked to capitalise on yields from short-dated cat bond notes which are soon to mature.

The other factors continuing to stimulate secondary cat bond trading in November were continued anticipation of the strong December’s issuance, totaling over $1.5 billion of risk capital, as well as anticipation of strong issuance through the first-half of 2015 as well as the need to adjust portfolios to take on new risk.

Zurich-based ILS and catastrophe bond investment manager Plenum Investments commented on November’s secondary activity; “Secondary market trading activity was strong during the month of November, driven mostly by the trading of shortly maturing CAT bonds; in Q1 2015 alone more than $3.6bn of CAT bonds will mature triggering portfolio rebalancing amongst market participants.”

The trading activity is a mix of investors freeing up capital for new deals and others looking to benefit from higher yields on some soon to mature issues.

“Some are planning to free up capacity in the overcrowded US hurricane risk class, while others want to benefit from the additional returns available from these short dated papers,” Plenum explained.

Craig Bonder, Managing Director and Head of ILS Trading at AK Capital, noted the same at his busy secondary trading desk; “We continued where we left off in late October with strong trading volumes largely driven by short dated paper for the month of November. With nearly $5 billion in paper maturing in the next few months many market participants have rebalanced portfolios either over weighting these assets or freeing up cash for what hopes to be a strong pipeline.”

With such significant maturities approaching there is the need to recycle capital into new risks and this is only going to get more important as we move into 2015 and the maturities accelerate through the first-quarter. Bonder expects these maturities and new issuance will drive the need for secondary trading, which could result in more busy months ahead.

“This month alone we saw about $1.5 billion of new issuance either price or be announced however more will need to come to make up for the maturities. These amounts and the pricing of these new deals will likely drive pricing in the secondary markets for the short term,” he explained.

Plenum Investments noted some peril-specific pricing trends in the secondary cat bond market during November; “In terms of price movements, prices were flat on average across the board, with the exception of US hurricane bonds, where spreads widened as a result of the supply with new issuances.”

Bonder noted another trend that is expected to become more prevalent in the secondary catastrophe bond market going forwards, the growing demand for higher-yielding paper. With the last year or so’s issuance seeing lower yields the vintage cat bonds with higher yields are only going to become more and more attractive to buy and hold, which could force pricing on these marks upwards. Already these higher yield, older cat bonds are stimulating secondary market performance.

Bonder commented; “High yielding assets remained firmly in demand helping the market earn a positive return for the month.”

Looking ahead towards other coming secondary pricing trends, Plenum Investments commented; “The spread widening on US hurricane bonds left its marks in the performance of the fund, which was only slightly positive. Moving into the peak months of the Europe storm season, we should see mark to market gains on these positions, which will help to compensate the price declines on hurricane bonds.”

The secondary market has the potential to become very interesting in the coming few months as the large amount of maturing bonds roll out of the market. It should stimulate some interesting trading strategies and we’d certainly expect the secondary desks to find their services in demand through Q1 of 2015.

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