S&P bullish on cat bonds but warns of likely downgrades for reinsurers
The COVID-19 pandemic has underlined the value of cat bonds, which have offered valuable diversification at a time when other asset classes have become highly correlated.
That is the view of S&P Global Ratings, published in a new report titled In A Correlated Market, Catastrophe Bonds Stand Out.
The report argued that publicly traded catastrophe bonds offer liquidity and diversification, and have performed well amid the generally volatile financial markets environment. S&P noted that investors had been able to sell cat bonds at close to par at the start of the crisis, as they sought to free up liquidity for other purposes.
The rating agency’s only rating action in the insurance-linked securities (ILS) sector has been a creditwatch placement, affecting a Swiss Re mortality cat bond specifically aimed at protecting the issuer against pandemic losses.
S&P said: “We do not expect investors in cat bonds to suffer significant losses as a result of COVID-19.”
After a short pause, cat bond new issuance has now resumed, S&P said, at slightly higher spreads. Although there is a chance that pandemic risks could spill over into some reinsurance contracts, the transparency of the triggers in catastrophe bonds should protect investors, it added.
However, S&P was less sanguine about the earnings prospects for the broader reinsurance industry. In a second report, titled COVID-19 Pushes Global Reinsurers Farther Out On Thin Ice; Sector Outlook Revised To Negative, it warned pandemic-related losses, volatile capital markets and lower investment returns will likely undermine earnings for the sector.
Johannes Bender, a credit analyst and author said: "Once again, the sector will not earn its cost of capital this year, bearing in mind it has struggled in the past three years to do so due to large natural catastrophe losses and fierce competition.”
S&P expects the global reinsurance sector to deliver a combined ratio of 101-105 percent in 2020, or more if global insured COVID-19 losses accelerate beyond $30 billion.
Taoufik Gharib, a ratings analyst at S&P Global Ratings, said: "We expect to take negative rating actions on reinsurers whose COVID-19 losses wipe out their earnings and become a capital event and that in our view won't be able to sufficiently rebuild capitalisation over the next 12 to 24 months, as well as for those reinsurers that entered 2020 with an already historical weaker operating performance.”
