ILS investment opportunity “never been so interesting”

VP Bank AG, the Liechtenstein-based private bank and asset manager, has said that the insurance-linked securities (ILS) investment opportunity has “never been so interesting”, with the highest yields in over a decade now possible, and further revaluation gains in hurricane Ian exposed catastrophe bonds expected.

All of which leads to the bank and asset manager having a particularly constructive view on the ILS investment market for 2023, with its recommendation being to overweight ILS within investment portfolios.

In fact, ILS is still the single most strongly-weighted asset class that VP Bank recommends at this time, given the positive prospects for investing into the ILS asset class right now.

VP Bank has been watching the catastrophe bond market closely, as it believes the chance of some additional value being recovered against cat bonds that have been marked down after hurricane Ian is high, citing the NFIP’s FloodSmart Re cat bonds in particular.

Right now, the entry point into catastrophe bonds is particularly attractive anyway, purely based on the forward-potential for returns from new issuances at the much higher spreads the market is clearing at today.

But, if you also take into account the fact valuations are depressed in some areas of the cat bond market, there could be a chance to enter the sector and benefit from any recovery as well.

Valuations are depressed broadly from the spread widening in the secondary market that saw many cat bond positions losing points in recent months.

The majority of those positions are not at-risk of any losses, so they should all recover to par.

But there are also still cat bonds that are exposed to hurricane Ian and have been marked down, with some of these expected to fair better than originally anticipated, at least based on early estimates of losses from cedents.

All of which, along with the much higher spreads of newly issued cat bonds, as the market bakes in higher reinsurance rates-on-line, means ILS in general offers investors the “Highest yields in over ten years,” VP Bank said.

“There is thus the possibility that outstanding Catastrophe bonds, which are trading well below par because of the uncertainty, will be repaid in full after all,” VP Bank explained.

Adding that, “In addition to these possible appreciation gains, yields of currently 13% before losses are tempting.

“Even if it is still too early to forecast losses in 2023, the situation has never been so interesting in the last ten years.”