Hurricane season uncertainty drove cat bond trading shifts in 2024: Swiss Re

The secondary market for catastrophe bonds in 2024 saw distinct shifts in trading activity, with periods seeing high-volumes of trades, as well as times when the market was bid-heavy but fewer trades occurred, according to Swiss Re Capital Markets (SRCM), the insurance-linked securities (ILS) division of the global reinsurer.

In its last ILS Market Insights report, Swiss Re highlighted a surge in trading at the end of the first quarter of 2024, as investors responded to redemption pressures by increasing bond sales.

However, as the market braced for a predicted “historically active” hurricane season, many investors opted to hold larger-than-usual cash positions, as they anticipated opportunities to purchase bonds at a discount in the event of a large hurricane.

“These cash positions, combined with the strong coupon accrual in the funds, contributed to a “bid-heavy” secondary market throughout much of the second half of the year,” SRCM noted.

Furthermore, the report also highlighted how there was a significant decline in secondary market trading during the second half of the year, as some investors chose to retain bonds despite elevated valuations, rather than converting holdings into cash to reinvest.

“If they sold their bonds in the secondary market, it was unlikely that they would be able to purchase new bonds at attractive prices,” SRCM explained, adding that this dynamic resulted in fewer trades, but an abundance of liquidity.

By the fourth quarter, however, an uptick in primary market issuance began to influence secondary trading, as investors moved to free up cash to invest in newly issued cat bond deals.

This shift ultimately helped restore balance between supply and demand for cash in the market.

SRCM concluded: “The market begins the new year with a much better balance between the supply and demand for cash than observed in early Q4 2024.”

In its latest ILS market report, Swiss Re also highlighted that the ILS market has grown by 10.5% year-on-year, and is on track to exceed USD 50 billion of notional outstanding in the near future.