Swiss Re Insurance-Linked Fund Management

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2020 a defining year for ILS as cat bonds roar back after COVID lull: Swiss Re


As insurance-linked securities (ILS) such as catastrophe bonds demonstrated their relative lack of correlation to broader financial markets again in 2020, the year was another defining one for the market, Swiss Re believes.

swiss-re-building-imageIn its latest ILS market report, Swiss Re Capital Markets, the specialist ILS focused unit of the global reinsurance firm, highlights some key happenings from 2020 that all suggest a market still in rude health despite the global pandemic, particularly on the cat bond side.

“2020 was another defining year for the asset class as the lack of correlation to broader financial markets was once again highlighted,” Swiss Re explained. Adding that, “The global market volatility seen at the outset of the COVID-19 pandemic created a liquidity event that was rather short-lived.”

Selling pressure impacted the secondary pricing of catastrophe bonds in this period, resulting in a decline and a temporary period of secondary spread widening, which caused primary issuances to be halted.

ILS markets held up well though, Swiss Re noted, saying that, “In the medium term, we expect that similar to the 2008 financial crisis, this low correlation performance will lead to renewed interest from end investors.”

The ILS market emerged from this initial pandemic related uncertainty and volatility “largely unscathed” and quickly issuance returned, with catastrophe bond sponsors flocking to secure capital markets backed reinsurance protection.

The primary ILS market, for catastrophe bond issuance as well as collateralized reinsurance, returned with a “roar” Swiss Re said.

Explaining, “Throughout the summer months new investments were made into ILS funds and spreads tightened throughout a strong 3rd and 4th quarter of issuance.”

Further explaining that, “During this time, new and existing ILS sponsors, as well as investors, continued to show confidence in ILS as a dependable capacity source that provides attractive investment returns.”

“All said and done, the 2020 new issuance market outpaced the USD 9.0bn in redemptions by approximately USD 2.3bn during the year, showing how strong the investor support of the asset class has become.”

The fact the ILS market showed such resilience through the pandemic and returned quickly to provide the important reinsurance capacity its sponsor-base needed, is reflective of a robust and well-functioning asset class.

“At the end of 2020, the ILS market saw outstanding catastrophe bonds grow by roughly 5% year-over-year. This is a great accomplishment for the market considering the pause in new issuance during March 2020, the large volume of maturities and more than USD 668m principal reductions recorded over the year,” Swiss Re said.

The ILS market and catastrophe bonds have demonstrated their lack of correlation and relative value for investors in times of volatility a number of times now, with each occurrence resulting in an increase in investor awareness and interest in the ILS asset class.

With existing investors showing confidence in catastrophe bonds and more money flowing to cat bonds funds from the current investor-base, the heightened interest and awareness in this market among investors not yet allocated promises to result in more inflows, as long as the product is there to invest in.

You can download all of Artemis’ quarterly catastrophe bond market reports here.

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