SINGAPORE -UNS- Financial markets have recently proved to be highly correlated, as the COVID-19 pandemic cut a swath through various different industries. However, as S&P Global Ratings says in a new report, recent events do not affect the modeling used to underwrite most outstanding insurance-linked securities (see “In A Correlated Market, Catastrophe Bonds Stand Out”).
Catastrophe bonds (cat bonds), for example, usually protect against specific named perils across different regions and cover predominantly residential risks, with limited exposure to commercial business. Hence, we do not expect investors in cat bonds to suffer significant losses as a result of COVID-19.
At the beginning of the pandemic, when financial markets were in turmoil, cat bonds also provided a liquidity benefit to investors, enabling them to sell their positions at close to par. Trading increased as investors rebalanced their portfolio, realized the value of their cat bonds to pursue short-term opportunities in equity markets, or converted their cat bond investments into cash to meet liquidity needs for margin calls on foreign exchange hedges.
The high number of cat bonds due to mature during 2020 suggests that new issuance, which has already restarted, is likely to remain active through the rest of the year. We expect ILS investors to seek higher returns at future renewals, following years of record losses from natural catastrophes.
This report does not constitute a rating action.