Quake, wildfire & diversifying cat bonds sold as Ian drives need for cash

As is the case after any really major catastrophe loss event that is expected to impact reinsurance, insurance-linked securities (ILS) and catastrophe bonds, the fact cat bonds have a secondary liquidity element and can be traded is proving useful to some ILS managers and investors.

With hurricane Ian currently estimated to cause perhaps the most significant catastrophe bond loss, from a single event, in history, as well as widespread losses to other private ILS and collateralised reinsurance contracts, the secondary cat bond market provides a welcome source of cash for some.

Artemis has learned that sales of catastrophe bonds that won’t be affected by hurricane Ian have increased, with our sources suggesting some ILS fund managers and direct cat bond investors are using these instruments as a way to source additional cash at this time.

In particular, cat bonds exposed to earthquake risks, wildfires and some other diversifying perils are being sold at slightly discounted prices.

As a result, this isn’t a fire-sale by any means, but the fact the prices these cat bonds are being sold at are discounted a little, suggests that while their holders were keen for cash, or to exit the positions, there are attractive buying opportunities evident for anyone with cash to invest at this time.

Which is another way that cat bond liquidity proves very useful, as while offering a way to sell positions in specific cat bonds, it also offers any well-positioned investors or fund managers a venue from which to pick up attractively priced notes in the wake of a major loss event for the insurance and reinsurance market.

A glut of US earthquake cat bond notes have been traded this week, as well as some US wildfire cat bonds, all at price levels slightly discounted from where they had been marked just a week prior to hurricane Ian’s landfall in Florida.

In general they have traded for just a few cents below their recent marks, in some cases by high single-digits.

There’s no reason for these cat bonds to be marked down, so this is clearly a case of an investor or fund manager being keen to sell and finding a willing buyer with cash to invest.

As a result, given these have been discounted slightly, the investor has immediately benefited from adding these quake, wildfire and diversifying cat bonds to its portfolio at attractive pricing.

Speaking with sources in the catastrophe bond market, this was not an isolated incident and numerous trades of cat bonds that are unaffected by hurricane Ian have occurred this week already.

Less apparent is any trading activity in distressed positions, so those US wind cat bonds though most exposed to losses from hurricane Ian.

Here, any discounts would have to be significant to be able to find a buyer and with it so close to the event still, it’s likely investors would rather still hold until greater clarity emerges over hurricane Ian’s eventual losses.

Being able to free up cash can be key for fund managers of collateralised reinsurance and private ILS strategies after an event of this magnitude, which can make cat bonds a valuable portfolio component, as they are possible to sell on for a very small discount right after an event, in this way.

Hurricane Ian will also drive a need for cash for some other holders of cat bonds, which could be insurers or reinsurers, as some are anticipating heavy losses to pay and with cat bonds easier to sell, it might make sense to some to use these to build up cash for paying claims.

Read all of our coverage of hurricane Ian, and our analysis on the potential market losses, here.