US insurers have minimal investments in ILS and cat bonds, says AM Best

According to AM Best, the global insurance-linked securities (ILS) market remains mired in earlier catastrophic losses as overall fund performance deteriorates, despite another year of record cat bond issuance.

In 2021, issuance in the cat 144a bond market hit a record high of about $12.5 billion, according to Best, surpassing the previous record set in 2020 by $1.5 billion.

However, he notes that despite the generally higher yields offered by cat bonds, US insurers only hold about $850 million of the approximately $33 billion in cat bonds outstanding.

Best observed that “the correlation with catastrophe risk in their underwriting books could be a concern when it comes to asset allocation.”

“According to our estimate, only about 40 insurers are exposed to cat bonds and five companies represent nearly 70% of investments.”

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Swiss Re’s US entities hold more than 20% of the sector’s investments, across a variety of risks and cedants, with the majority of other investors being life insurers.

Just over a third of these insurers’ ILS and cat bond holdings are below investment grade — mostly NAIC-4 and NAIC-5 — while less than 30% are NAIC-1, Best says.

He added that financial guarantee and mortgage insurance risks account for nearly half of the insurance industry’s exposure, with the risk being ceded by various companies.

Issuance of mortgage ILS has become more common over the past three years, Best says, adding that if issuance continues, we may see increased interest from insurers in additional investments.

Best concludes that despite the growth of the non-catastrophic ILS market and increased interest in these types of transactions (particularly those involving the transfer of property and casualty insurance risks), investments by U.S. insurers in these classes of Assets are minimal at this stage, apart from financial collateral and mortgage insurance risks.

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