Swiss Re Insurance-Linked Fund Management

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Swiss Re optimistic on ILS market‘s prospects


The continued availability of insurance-linked securities (ILS) capital in 2019 highlights the “strategic partnership” between sponsors and capital markets investors, according to reinsurance firm Swiss Re.

swiss-re-building-logo-newCommenting on catastrophe bond and ILS issuance in the first-half of 2019, the reinsurance firms capital markets division explained that it remains optimistic on the asset class, despite the challenges faced across the last two years of catastrophe losses.

Swiss Re Capital Markets notes the stark contrast between the first-half of 2018, when after losses new capital flowed back in and stimulated growth of the sector and stronger cat bond issuance, with the first-half of this year when capital inflows dried up and cat bond issuance slowed.

“Loss events locked up a disproportionate amount of collateral, leading to less capital to redeploy into the market,” the company explained.

Which added to the loss creep that came from typhoon Jebi, meant that investors and ILS funds did not rush to deploy new capital.

Investors preferred to “wait and see how the market performed to determine whether the market displayed the right risk-return characteristics and to assess the performance of the investment funds and/or sidecars.”

As a result, an increased level of “qualitative diligence” has been seen on the underwriting side in ILS, Swiss Re explained, leading to spread-widening for perils like wildfires and aggregate trigger structures.

With maturities also slow in the cat bond world through H1 2019, it meant there has been limited new capital to deploy, resulting in a slower issuance pipeline and also a downsizing in terms of deal sizes.

But, the reinsurance firm feels there are signs of positive capital inflow, as recent deals have upsized and priced at the tighter end.

“This reflected a positive trend of capital flowing back to the market,” the reinsurer said.

Explaining, “It is heartening to see market participants continuing to find value in this collateralized, diversified capacity source.”

As a result, the company said it believes the signs are good for the rest of the year, as ILS emerges out the other side of its challenges.

“We remain optimistic on the market‘s prospects as all asset classes go through cycles — we believe the ILS market is no different,” the company explained.

The fact that alternative capital did remain available, albeit at a contracted level, “highlights the strategic partnership that has been fostered by sponsors and investors over the past decades,” Swiss Re Capital Markets said.

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