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Tighter cat bond market expected to boost activity

Tightening spreads on the cat bond market should lead to a pick-up in activity later in the year after a subdued second quarter, Aon Securities CEO Paul Schultz said in the company's latest insurance-linked securities (ILS) review.

"Many investors have capital to deploy which should continue to lead to further secondary price increases and a relative improvement in attractiveness of the efficiency in the cat bond market," he said.

This adds to commentary previously reported by sister publication Trading Risk. Earlier in July, Swiss Re's co-head of ILS Jean-Louis Monnier said the US cat bond market had "played catch-up" in the last few months, with spreads falling after 18 months of stability.

Only five new cat bonds worth $800mn were issued in Q2, leading the market to shrink by $2.1bn after maturities. Aon Securities put the contraction down to competition from traditional markets, as well as some cat bond sponsors bringing forward deals to Q1.

But once collateralised reinsurance was included, overall ILS capital deployed grew, the broker-dealer said.

The cat bond deals that came out in Q2 were notably high-risk and produced a weighted average spread of 8.4 percent, which was the highest in four years.

As new issuance activity slowed, so too did secondary market trading. Aon Securities counted 218 trades worth $245mn reported to Finra's Trace registration system during the period - down 32 percent from Q1 by number of trades and down 20 percent by value.

One of the second quarter's deals - Blue Halo Re for Nephila's fronting partner Allianz Risk Transfer - was the first to use Aon's Catstream issuance platform, which is designed to streamline the placement process.

The Aon All Bond ILS index returned 1.67 percent in the quarter, ahead of the 0.54 percent gain achieved in the same period last year. This was partly due to higher prices on the secondary cat bond market.

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