20 February 2019ILS

Cat bond rate hardening expected in 2019: Swiss Re

Against a backdrop of 18 months of above average industry losses, Swiss Re expects investors will likely want to see rates harden in 2019, especially for loss impacted tranches.

This is according to Swiss Re's insurance-linked securities market update for February 2019.

Swiss Re expects this hardening could be expected particularly for aggregate transactions and for structures exposed to perils with less robust catastrophe models.

"Since 2012, cat-bond spreads have trended downward as investors established comfort in the market, but like any other market, spreads do not always move in one direction," the report said.

It continued: "Despite a potential hardening scenario we believe the ILS value proposition still rings true as a diversifying and complementary capacity source."

Due to California wildfires and Hurricanes Florence and Michael, market volatility spike in the second half of 2018. Swiss Re noted that while this exposed numerous cat bonds to potential losses, it underscored the market’s value as a diversifying asset class and source of consistent liquidity to investors.

The Swiss Re Global Cat Bond Total Return Index experienced positive monthly returns until October, followed by a run of three negative months to the close of 2018. Overall, the index finished the year with positive performance.

At the end of 2018, total ILS issuance reached $9.7 billion across 29 transactions and 49 tranches, with Bermuda home to a large majority of new issuance.

This is down 8 percent from 2017's $10.5 billion, however 2018 is still placed as the second highest year of issuance volume since the ILS market's inception.

The third quarter of 2018 was the second-highest issuance ($1.55 billion), nearly doubling the figure for the same period in 2017 ($780 million). Swiss Re attributes this issuance to new sponsors US National Flood Insurance Program NFIP and PG&E issuing their first-ever cat bonds, which covered pure flood and pure wildfire perils, respectively.

The the $500 million FloodSmart Re 2018-1 cat bond was designed to transfer a portion of the NFIP risk to capital markets. The FloodSmart Re 2018-1 cat bond was the first to provide reinsurance coverage for flood risk and the ­first for the NFIP.