ILS market insights: March 2023

Swiss Re Capital Markets is pleased to bring you our year-end review of the Insurance- Linked Securities (ILS) market in 2022. At the beginning of the year, macro-economic pressures presented themselves to the capital markets, but within the ILS market, every challenge came with an opportunity.

As sponsors navigated rising inflation and increased claims costs, investors were faced with constrained capacity, especially compared with recent years. Investors renewed focus on inflation and how rising replacement costs and insured values could affect the severity of loss during large natural catastrophe events.

The ILS market began the year with both primary and secondary market spreads at near all-time lows. Moving into the second quarter, the market began to show signs of lower capacity levels driven by the weak performance of other asset classes. With allocations to alternative assets outperforming traditional equity and fixed income markets, end investors found a need to sell alternatives in order to rebalance their portfolios. Simultaneously, Foreign Exchange rates created liquidity pressure for funds denominated in currencies other than the US dollar. With a strengthening dollar, these funds saw their USD equivalent assets under management falling sold some bonds to maintain liquidity. By June, the spread widening seen as a result of some of these rebalancing efforts created a pause in the new issuance market. Secondary market trading volumes were also observed to be low. With very limited capital returning to investors in the form of maturities during the period it is no surprise that this trend continued throughout the second half of the year.

During the peak of the hurricane season, Hurricane Ian made landfall on the West coast of the Florida peninsula. This event caused the catastrophe bond market to take a further pause as the full extent of the insured losses were unknown until claims data became available for investors to digest. Ian created a liquidity event in the market and some investors sold bonds to avoid taking any material losses. When the dust settled late in Q4 2022, estimated losses from bond sponsors were not as severe as the market initially anticipated and the cat bond market had yet to pay out a loss due to Hurricane Ian.

During Q4 2022, the ILS market showed signs of changes given the new pricing paradigm. Transaction sizes were lower and some new issues from primary market dealers were either delayed or pulled from the market after being announced. As an asset class that has demonstrated low correlation to core financial markets, recent catastrophe bond issuance increased relative value among corporate bonds and low volatility compared to equity markets, making ILS an even more appealing investment for fixed income and multistrategy portfolios. In this issue, we examine the evolution of the market and recap certain areas of focus. We hope the report brings you insights and generates interest in this asset class and we look forward to another year of resilience in 2023.