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 bogged with prior catastrophe losses as the overall performance of funds deteriorates, despite another year of record cat bond issuance.

In 2021, issuance in the 144a cat bond market reached a record of approximately $12.5bn, says Best, exceeding the previous record set in 2020 by $1.5bn.

However, it notes that despite the generally higher returns cat bonds offer, US insurers hold only about $850m of the roughly $33bn outstanding cat bonds.

Best observed that “Correlation with catastrophe risk in their underwriting books could be a concern with regard to asset allocation.”

“By our estimate, only about 40 insurers have exposures to cat bonds and five companies account for nearly 70% of investments.”

Swiss Re’s US entities hold more than 20% of the industry’s investments, across a variety of risks and cedents, with the majority of the 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, says Best.

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

Mortgage ILS issuance has become more prevalent over the last three years, says Best, adding that if issuance continues, we could see further interest from insurers for additional investments.

Best concludes that despite the growth in the non-catastrophe ILS market and heightened interest in these types of transactions, (specifically those involving the transfer of casualty and liability insurance risks) US insurers’ investments in these asset classes are minimal at this point, aside from the financial guarantee and mortgage insurance risks.