Index-trigger cat bonds reprice again, making for a compelling entry point: Icosa

The catastrophe bond market underwent a further phase of spread widening in the last week, with industry-loss index trigger cat bonds leading the way again and now, the wider spreads are being cited as an opportunity for investors to enter the market by Icosa Investments.

Just a couple of weeks back, Swiss catastrophe bond focused investment manager Icosa Investments highlighted that the catastrophe bond market recently suffered one of its most significant weekly declines outside of the US hurricane season, with industry-index trigger cat bonds leading the way and almost all pricing down.

While this correction may have been thought to be a one-off move, in reaction to a primary cat bond issue pricing higher and perhaps influenced in part at least by the introduction of a new model version and view of risk, the trend towards wider spreads has continued in recent days.

Commenting on last week, Icosa Investments explained that the ongoing turbulence in the cat bond market has driven yields significantly higher for index-trigger cat bonds.

“Cat bond prices have experienced another turbulent week, with the market dropping approximately 0.58% in value (ignoring coupon payments). This extraordinary price movement occurred despite the absence of new catastrophes. This valuation shift was instead (again) driven by a newly issued index-linked cat bond that had to offer a significantly higher spread than initially announced to attract sufficient investor demand,” Icosa Investments said.

Adding that, ” Of course, this triggered another round of repricing of essentially all outstanding index-linked cat bonds.”

The investment manager continued, “This is the second time in recent weeks that the repricing of index-linked cat bonds has caused sharp negative pricing moves for cat bond investors. We had warned in early April that such a correction was highly likely, given the obvious relative value mismatch between index-linked cat bonds and the rest of the market at that time, and positioned our portfolios accordingly.”

Before concluding, “Despite this small setback in performance, investors should recognise that, barring a natural catastrophe, this is an excellent entry point into the market. Three months ago, concerns were focused around potential spread tightening reducing the opportunity set, but the opposite has occurred. Cat bond spreads have widened significantly YTD, presenting a compelling entry point for investors.”

Icosa Investments CEO Florian Steiger called this, “One of the best entry points into the cat bond market in many months.”

He further said, “Many investors express interest in cat bonds but prefer to wait for a catastrophe event before investing. While no catastrophe caused the recent spread increase, the effect is similar: a substantial rise in expected returns, making this an attractive investment opportunity.”