Swiss Re Insurance-Linked Fund Management

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ILS capital influx beginning, expected to persist: Swiss Re’s Rüede


Global reinsurer Swiss Re, which has been expanding its alternative reinsurance capital strategies in recent years, is seeing the “beginning of an influx” of capital into insurance-linked securities (ILS), something it believes will continued, Philipp Rüede, Head of the firms Alternative Capital Partners unit told us.

philipp-ruede-swiss-reRüede was speaking to us in a recent interview and explained that institutional investors are showing increasing appetite for insurance-linked securities (ILS), as wider ILS spreads attract new and greater inflows.

Institutional investor appetites and focus has adjusted since the outbreak of the COVID-19 pandemic, which while not particularly impactful for ILS or catastrophe bonds in general, has had an influence on flows into the sector, as well as in trading activity.

We asked whether Swiss Re is expecting a resurgence of ILS investor appetite as the volatility in capital markets created by the pandemic subsides?

Rüede explained, “The current dynamic is remarkably similar to the financial crisis over a decade ago, when the ILS market remained liquid during a period of broad financial dislocation in almost every asset class. The widening of ILS spreads didn’t impact valuations to the same degree as some credit instruments and that has proved once again the benefits to investors of allocating to ILS.

“To some extent there has already been a resurgence, with spreads tightening in July and signs of new capital coming into the market. We would expect this trend to continue into 2021.”

While capital market volatility and dislocation caused by the pandemic looks set to drive investors towards asset classes that can offer defensive and uncorrelated qualities, with ILS set to be a beneficiary of this.

It is the lifting of spreads in the ILS market, partly on the back of elevated investor return expectations after recent loss years and now the pandemic, but helped of course by broader reinsurance and retrocession market hardening, that should secure inflows for certain market players.

Rüede continued, “We are now witnessing the beginning of an influx of capital to take advantage of wider ILS spreads (which are certainly off their peaks but still at heightened levels) and that has resulted in stabilization of the ILS market.

“It is our expectation this influx of capital will continue as current spread levels haven’t been this wide since 2013 and a continuation of the pricing momentum will attract more institutional capacity.”

The catastrophe bond market is one area where these inflows of capital can be utilised and Swiss Re’s belief is that issuance should be strong through the remainder of 2020.

“With a large volume of bonds maturing and with signs of new capital coming into the cat bond market we expect that a large number of sponsors will be attracted to the market both to renew existing capacity and to bring new deals to market. We therefore expect a busy issuance pipeline in Q4 2020 and into early 2021,” Rüede said.

The ILS market has opportunities to put this capital inflow to work in helping new entrants tap securitised reinsurance capacity, with new sponsors expected to come to market to tap into the capital available and the appetite of ILS investors, Rüede believes.

“It is during the most uncertain times when our clients need to access the broadest possible pool of capital. Potential new sponsors sitting on the side-lines could include primary insurers, corporate sponsors, asset managers and even governments,” he explained.

Adding that, “However, for the market to further expand, our clients will need to have a strategic approach. We feel that it is during such times when it most helpful not to simply act as a traditional catastrophe bond underwriter but to have a deep understanding of a risk takers’ mindset in order to act as a natural bridge between our ILS client’s objectives and investor’s expectation. Being able to successfully navigate this uncertainty will be key in allowing for a strong issuance season in the upcoming months.”

Also read: Swiss Re’s alternative capital assets managed near $2.5bn: Rüede.

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