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ILS market shrinks 1.35% in H1 2020: Swiss Re

The ILS market shrunk by 1.35% since the end of 2019, despite healthy new issuance in H1, according to Swiss Re’s August ILS market update.

There was a flood of issuances in H1, totalling $6.75bn, up on the total for the whole of last year of $5.5bn, but a multitude of maturities and payouts for 2017 and 2018 events outweighed the new transactions.

“I think we are very optimistic about where current sentiment is from investors where bonds are trading that we can hopefully make this up by the end of the year,” said Judy Klugman, managing director of Swiss Re Capital Markets.

“When I look at how the market has performed over the past six months, especially since the onset of Covid, our market has held up remarkably well. The reason why investors participate in this market because it is a diversifier to the rest of their portfolios, that absolutely rang true.”

New and long-absent sponsors came to market in the first half of the year.

For the first time since 2013, RenaissanceRe tapped the ILS market by bringing Mona Lisa Re 2020-1 Classes A&B that cover US wind and earthquake.

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In the secondary market there was sell off at the beginning of the pandemic, when multi-strategy asset managers seeing opportunities in other markets sold cat bonds which held stable valuations compared to other assets classes at discounts to par value.

Some ILS-specific fund managers joined those looking to sell bonds, driven by a need to sell assets to meet margin calls on currency swaps with most cat bonds being issued in US dollars, the report noted.

Other investors turned to the secondary market, where cheaper and higher-yielding assets were ubiquitous, as the new-issue market took a three-week hiatus, the report continued.

This caused spreads on new issuances to follow the trend of the secondary market to stay competitive for investor capital.

As a result, the first half of the year demonstrated a much higher average spread to expected loss multiple compared to 2019, with a year-over-year increase of roughly 18%, the report noted.

This did not deter sponsors, who want diversity in their capacity sources, said Klugman.

“They understand the pricing dynamic that one market may be more expensive than another but that it is prudent to have access to two markets.”

She said if the capital markets pricing was to tighten significantly then on the margins more sponsors maybe would increase the sizing.

“I think it’s a sizing question, how much do they do in any particular market,” she added.

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Capital concerns

Swiss Re said as potential Covid-19-related ambiguity rumbled through the ILS market, the capital position of the market was often in question as investors feared redemptions.

By late Q2, the market dynamic changed, as an abundance of maturities returned capital to investors and anticipated fund redemptions did not materialise.

For example, in early June, nearly $2bn was returned to the market via maturing cat bonds. That followed more than $1.4bn of maturities in May, and before nearly $900m of expected maturities at the beginning of July.

The pause and slowdown due to Covid-19 turmoil allowed the flow of capital to rebalance, and the maturities to catch up to the issuance levels, the report said.

ILS fund managers who were fearful of fund redemptions have been able to raise funds.

“The relative stability of the ILS market throughout this period and rate increases seen across the (re)insurance industry proved to be attractive,” Swiss Re said.

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