Hardening cat bond market an opportunity for investors: Ruoff, Schroder Secquaero

The secondary market for catastrophe bond trading has offered some good opportunities in recent times, but with the focus now back on primary issuance, it’s an interesting moment for investors, says Stephan Ruoff of Schroder Secquaero.

Ruoff, the Deputy Head of insurance-linked securities (ILS) asset manager Schroder Secquaero, a specialist division of global investment group Schroders, recently spoke with Artemis as part of our series of video interviews with leaders and experts from across the reinsurance and ILS space.

Part of the discussion focused on the catastrophe bond market, a sub-sector of the ILS asset class that has been interesting to watch through this period of Covid-19-induced financial market disruption.

With some investors looking to exit or downsize their holdings, seeing cat bonds as a good liquid opportunity, Ruoff explained that for a period, there were some good opportunities in the secondary market.

“We definitely have (seen opportunities),” said Ruoff. “One of my colleagues said we’re like the ATM for the financial markets in some way, because indeed we are liquid, we have not had huge impacts.

“Traditionally, Schroder Secquaero has been a large player in the bond space, so the secondary market trading has offered indeed good opportunities, especially towards the end of March when markets were still quite volatile.”

For a specialist like Schroder Secquaero, a typically very strong liquidity position helped the firm trade in a number of instances, and Ruoff explained to Artemis how this in turn helped it enhance investors’ portfolios.

But while it was an interesting time, “the window was not that long,” said Ruoff. “What we see today is that we switched very quickly from a secondary market focus back to a primary market focus.”

Catastrophe bond issuance was huge in the first-quarter of the year, and while activity in Q2 has been hit by financial market volatility, the pipeline appears to be building with deals pricing and closing.

“Really I was surprised to see how quickly the market was able to move back to let’s say providing capacity, to new deals or to deals that had matured and are now reissued, so that was good to see,” said Ruoff.

Regarding the primary issuance that has come in, Ruoff told Artemis that there’s a few elements that have had an influence on market dynamics.

“I think the secondary market trading, with the spread widening that we saw, has somehow led the way toward what’s to come on the primary side as well.

“So, from what we see today, probably one bond that has been withdrawn at the end of March from the market and now has come back to the market with a higher, or a better pricing, is a good sign of a hardening market overall. The hardening market is certainly not just driven by capacity it is also driven by the underlying reinsurance improvements that we see on a broader scale, so that’s a second element I would count into it.

“Now, with bonds that we see right now, indeed pricing goes up, becomes even more attractive and I think when I look at our portfolios we haven’t seen yield levels of that significance in probably a number of years, actually.

“So, I think it’s a good opportunity for investors, but it also shows the resilience of this market,” said Ruoff.

The video is embedded below. All of our video interviews can be viewed in full here.

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