Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

Two competing forces acting on catastrophe bond secondary market prices


The risk of an above average U.S. hurricane season and the abundance of investor capital waiting to be put to work are two competing forces which are currently acting on secondary market prices of catastrophe bonds according to investment manager Clariden Leu in their latest monthly managers report.

The first of the two forces, the threat of an above average U.S. hurricane season, would usually depress prices in the secondary market quite significantly. Readers who follow Artemis will know that prices have been following their usual trend at this time of year, but seem more stable than normal, surprisingly so given the factors that have affected the market in recent months.

The second of these forces that Clariden Leu identifies is helping secondary market cat bond prices to remain firm in the face of the hurricane season. They suggest that strong investor demand, caused by an abundance of capital waiting to be put to work in the market, is holding up prices. We’ve also heard that at times competition for secondary market positions can be fierce with many investors wanting to hold their positions as primary issuance has been so slow, while others want to exchange theirs to achieve better diversification.

Clariden Leu’s comments are in line with the sentiment we are hearing from market sources. The demand will only be satisfied by an increase in primary market supply, but as we’ve written recently investors may have to wait until Q4 for any sort of meaningful primary market cat bond issuance to occur.

It’s a healthy position for the market to be in considering the damaging events of the first half of the year and other issues which could have dramatically impacted positions such as the updated catastrophe risk models. Having significant investor interest and demand means that any cat bond deals which come to market are likely to be subscribed quickly and this increases the chance of deals being successful over years where investor interest is lower.

Clariden Leu suggest that they are active in the secondary market at the moment as a way to ensure that their funds remain well diversified. They also invested in their own Cat Bond Lite issuance recently. Interestingly Clariden Leu say in the same monthly report that they declined to invest in the recent Loma Re cat bond as they felt the premium offered was not sufficient for the risk involved. They expect their fund will deliver stable returns over the coming months, helped by secondary market prices, unless a major catastrophe occurs.

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