ILS market insights: August 2022

The Insurance-Linked Securities (ILS) market has once again demonstrated its resilience as an asset class through 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. 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.

With over USD 8bn issued in catastrophe bonds, the ILS market gave sponsors an alternative source of risk transfer capacity in a hardening reinsurance market. Some reinsurers have reduced capacity in peak zones or closed their natural catastrophe (nat cat) portfolios entirely, which has led to increased opportunities in the ILS market. Given the need for more overall reinsurance capacity, we expect the trend of increased new issuance volume to continue and result in further growth.

Investor returns year-to-date have been slightly negative (–0.35% as represented by the Swiss Re Global Cat Bond Total Return Index) 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. The negative return was mainly driven by spread widening as a result of the hardening reinsurance market, suggesting an improved outlook for returns in years to come. Barring any major natural catastrophes which might cause principal losses, we expect performance should recover strongly in the second half of the year.

The six-month period has demonstrated the strengths of the asset class to investors and sponsors alike, positioning the market well for its next stage of growth. Swiss Re Capital Markets (SRCM) sees increasing interest from both new potential sponsors looking to diversify their risk transfer capacity sources, and from end investors who want to benefit from this historically lightly correlated asset class. Bringing both of these groups to the ILS market is a key objective of SRCM as we continue to lead the market forward.