ILS new issuance spreads widen by up to 30% due to COVID-19: Swiss Re

New issuance spread in the insurance linked securities (ILS) market widened by 20-30 percent due to the impact of the COVID-19 pandemic, according to the  latest report on the ILS market by Swiss Re. 

The ILS market saw a record-breaking $3.96 billion in new issuance during Q1, despite the disruption to the market in March, Swiss Re said. The market then picked up again later in Q2 after the initial market volatility resulting from the emergence of COVID-19. The market ultimately saw $6.75 billion of new issuance for the first six months of the year.

Despite this, the ILS market has shrunk by 1.35 percent since the end of 2019, measured by notional outstanding, with a multitude of maturities and payouts for the events of 2017 and 2018 outweighing this new issuance, Swiss Re added.

Swiss Re noted that the ILS sector had seen tightening spreads in January and February, with the sector flush with capital. That dynamic quickly changed once the implications of the pandemic and the resulting economic shutdown became clear, with investors seeing cheaper and higher-yielding assets elsewhere in March as new issuance froze. That caused spreads on new issuances to follow the trend of the secondary market, Swiss Re explained.

Swiss Re noted that the ILS market had remained liquid during the crisis, allowing investors with cash to take advantage of the widening spreads. “Certainly the widening of ILS spreads didn’t impact valuations to the same degree as broader credit instruments,” Swiss Re said.

In late Q2 an abundance of maturities that returned capital to investors, and some anticipated fund redemptions failing to materialise, led to nearly $2 billion being returned to the market via maturing cat bonds.