Catastrophe bond returns to “recover strongly” in H2: Swiss Re

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After a first-half during which returns from catastrophe bond investments have been depressed, although still much better than many other asset classes, Swiss Re Capital Markets expects that cat bond fund returns will “recover strongly” through the second-half of 2022.

Increasing reinsurance and ILS ratesFor the first-half of 2022, the Swiss Re Global Cat Bond Total Return Index was slightly negative at -0.35%.

“But compared to global equity and bond markets, ILS has proven once again to offer relatively low volatility and very low correlations in times of wider market stress,” Swiss Re explained.

The company said that the insurance-linked securities (ILS) market “once again demonstrated its resilience as an asset class” through the first-half of the year, that was characterised by a period of heightened volatility across financial markets.

“Over the first half of the year, the broader financial markets have navigated rising inflation, the conflict in Ukraine and interest rate fluctuations, and consequently, volatility in the equity, fixed income, commodity, and foreign exchange markets,” Swiss Re Capital Markets said, also highlighting that, “Despite these factors, ILS markets have performed relatively well throughout the first half of 2022 with year-to-date returns only slightly negative for the year and the third most active H1 for new issuance on record.”

In fact, the negative return was in the main “driven by spread widening as a result of the hardening reinsurance market,” so not by the macro-economic situation, or capital market volatility.

As a result, Swiss Re Capital Markets believes this suggests, “An improved outlook for returns in years to come.”

With a chance the catastrophe bond market gets to realise some of the performance it had lost in the first-half, as spreads normalise further.

“Barring any major natural catastrophes which might cause principal losses, we expect performance should recover strongly in the second half of the year,” Swiss Re said.

One positive from the now elevated level of spreads in catastrophe bonds, helped by higher reinsurance pricing, is the fact the asset class has become increasingly attractive again.

As a result, Swiss Re Capital Markets said it believes, “Current ILS spreads and ILS market performance will attract new capital to the market.”

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