The global insurance and reinsurance market, including insurance-linked securities (ILS), currently offers “one of the best entry points for investors in decades” according to Twelve Capital CIO and Founding Partner Urs Ramseier.
Writing in a letter to investors, Urs Ramseier explains that the insurance and reinsurance markets have faced and continue to face multiple risks, from the geopolitical environment, to recessions and economic factors, to climate change, but adds that these have also driven a market dislocation.
“The current market dislocation brings new investment opportunities in many asset classes and Twelve Capital believes this is now one of the best entry points for investors in decades,” Ramseier said.
On top of this dislocation, the insurance, reinsurance and risk transfer markets present a growth opportunity, as demand continues to rise and is expected to accelerate.
Ramseier explained, “Growth in demand for insurance will be supported in the following years as the impacts of climate change become more pronounced and actors seek to close protection gaps for natural catastrophes, complementary health and pension products. In this context, financial markets and alternative capital providers such as Twelve Capital are vital in supporting and offering solutions.”
All of which makes Twelve Capital particularly constructive on these markets and insurance-linked securities (ILS) for 2023.
“Historically high spread levels” in the ILS and catastrophe bond market are now an added benefit on top of the continued proven diversification and low correlation that the asset class offers to investors.
Tighter reinsurance capacity, as well as all of the factors that have caused market dislocations, now promise to keep spreads more elevated in ILS and cat bond markets, making this a strong entry point to the asset class.
Commenting on the last year for the ILS market, Ramseier said, “During 2022, ILS have shown their value again as a diversifying asset class thanks to a positive start into the year, when other financial markets exhibited significant volatility. However, diversification does not mean risk free, as was shown by the impact of Hurricane Ian in September, which has brought some losses for the ILS and Cat Bond markets. Fortunately, with loss estimates of around USD 50-60bn, the overall impact for the asset class appears to be manageable.”
The effects of which has driven the hardening of reinsurance and widening of cat bond and ILS spreads.
Leading to a situation where the average cat bond yield in the market stood at around 14% in USD as of December.
“The increase compared to previous years was driven by both a significant increase in money market rates and a substantial increase in the spread,” Ramseier commented.
On the private ILS side, so where collateralized reinsurance and retrocession contracts are securitized into investment portfolios, Ramseier also notes the much higher returns now available.
“In the Private ILS sector, we see highest premium levels for decades. In addition, there is a significant improvement in contract language, terms and conditions,” he explained.
As a result of which, “The current market environment presents an interesting opportunity for new investors to enter the ILS market or for existing investors to top-up on their holdings.”
Twelve Capital also sees attractive opportunities in the other types of insurance and reinsurance linked assets the manager invests in.
On insurance bonds, Ramseier said, “Insurance Bonds start 2023 with yields last witnessed in 2010 and 2011 after the global financial market crisis. Fast forward to today and the fundamentals of the insurance sector have never been healthier, also thanks to the upgraded and conservative regulatory regimes put in place over the past years.
“In 2023 we expect Insurance Bonds to appeal to those investors who are seeking to protect their portfolios from the slowing economic backdrop given the industry’s more defensive nature. An allocation to Insurance Bonds offers a sensible solution for the need to have a reliable coupon, higher quality credit whilst protecting portfolios from defaults or ratings downgrades. In Twelve Capital’s view this sheer demand will keep Insurance Bonds’ spreads relatively contained while there is potential for capital gains due to spread decompression in addition to a very attractive running yield.”
On insurance private debt and enhanced credit investments, Ramseier explained, “We believe 2023 to be an interesting entry point for investors in Insurance Private Debt and Enhanced Credit. We think that smaller and mid-sized insurers can once again show resilience to an inflationary and recessionary environment, in contrast to general corporate issuers.”
He added that the deal pipeline looks healthy in this segment as well, with yields in the 8%-12% range in EUR available for defensive credits.
“Inflows and the natural churning of the funds we manage allow us to take advantage of these opportunities while maintaining well diversified portfolios by both line of business and geography,” Ramseier said.
On insurance and financials equity investments, Ramseier believes these exhibit defensive characteristics and offer fundamentals that are in a more resilient position than in other financial crises, while also benefiting from elevated interest rates and having significant opportunities in addressing the funding gap to reach net zero.
Finally, Twelve Capital manages multi-asset portfolios, across insurance-linked asset classes, and Ramseier said, “After a challenging year for almost all asset classes, the outlook for a dynamic Multi Asset strategy in the insurance sector looks very compelling.”
Harder reinsurance rates will benefit reinsurers as well as the ILS market and this stands to drive return opportunities across many insurance-linked investment classes.
“We believe current market dynamics will remain supportive throughout 2023,” Ramseier said.