COVID-19 showcased value of catastrophe bonds to investors: S&P
Publicly traded catastrophe bonds have performed well amidst the current financial markets volatility created by COVID-19, reveals a new report by S&P Global.
Analysts at S&P do not expect investors in cat bonds to suffer significant losses as a result of COVID-19. In fact, they believe that the pandemic has "showcased the value" of these bonds to investors, offering a liquid asset class that was not correlated with the current volatile financial markets.
Catastrophe bonds usually protect against specific named perils across different regions and cover predominantly residential risks, with limited exposure to commercial business.
S&P said the 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.
According to the agency, cat bond new issuance has already resumed after a short pause, at "slightly higher spreads". Although, it noted that, there is a chance that pandemic risks could spill over into some reinsurance contracts, but the transparency of the triggers in catastrophe bonds should protect investors.
S&P stated that 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 report said.
"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."
