Relative value of ILS investing evident in 2021: Swiss Re

2021 saw the catastrophe bond market soften, with a trend towards tightening across most of the year, but differentiation remained, driven by investor appetites, but according to Swiss Re Capital Markets the relative value of the insurance-linked securities (ILS) asset class persists.

As we explained yesterday, the end of the year saw cat bond investors both displaying their strong appetite for certain ILS risks and perils, as well as their caution for others, which was reflected in the pricing of December cat bonds.

The latest cat bond market report from reinsurance firm Swiss Re’s Capital Markets unit goes further into these trends, explaining that some perils saw spreads tightening faster and further as investors shifted their focus during 2021.

Swiss Re Capital Markets estimates that the average multiple on newly issued catastrophe bond transactions declined by about 11% year over year in 2021, contrasting to its estimate of a 16% increase from 2019 to 2020.

Artemis’ figures show a little higher change, percentage wise, but reflect the same trends of harder cat bond market pricing through 19/20 and then a softening through 2021.

But one interesting observation from the Swiss Re Capital Market’s team is that issuance spreads for California earthquake risks declined faster, as “investors looked to diversify away from a growing, peak US wind risk marketplace.”

That observation speaks to the need for more diversification in the catastrophe bond market, as well as the opportunity for sponsors to capitalise on investor appetite for diversifying perils.

Despite this softening and tighter spreads, “catastrophe bonds have served as a good complement to a fixed-income portfolio” through the low-interest rate environment, Swiss Re Capital Market’s said.

Ed Johnson, Head of ILS Sales EMEA & APAC at Swiss Re Capital Markets explained, “Throughout the year, spreads declined but the ILS market continued to represent relative value compared to the credit markets.

“So not only did the sector provide meaningful diversification but it did so with excess margin, thereby cementing its valuable role in a fixed-income portfolio.”

As represented by the Swiss Re Global Performance Total Return Index, an Index tracking catastrophe bond returns, catastrophe bonds continue to deliver attractive returns, compared to the broader fixed-income marketplace.

Compared to corporate credit right now, catastrophe bonds are “showing true relative value” Swiss Re Capital Market’s explained.

Adding that its Index, “Shows the benefit of stable mark-to-market pricing during financial economic events, and a steady upward trend even during years of high catastrophic losses.”

“Along with the diversification and low correlation to financial markers, the catastrophe bond market offers attractive returns when compared to the broader fixed-income asset class,” Swiss Re’s team explained.