Insurance-linked securities benefit from pandemic premium hikes
Global fund manager Twelve Capital said major investment opportunities had emerged in the insurance sector in the wake of the COVID-19 crisis.
Urs Ramseier, chief executive and chief investment officer of the Zurich-based asset manager, said COVID-19 “was not a huge disaster for the (insurance) industry, but it is meaningful”. He added that the impact on mortality risk would be “digestible”.
“We don’t see big losses based on excess mortality,” he said, as part of the Fiduciary Investors Digital Symposium. “The people affected by COVID-19 are generally older people, 65-plus, and there is limited mortality insurance of people in that age group.”
Some insurance sectors are also expected to benefit, including motor insurance, with profits on track to record highs because of fewer accidents.
The major concern for the industry is commercial non-life insurance, in particular business interruption. “To what degree is business interruption due to lockdown covered by insurance policies? That is the big topic.”
Ramseier said some insurance outcomes from the outbreak were clear, such as for organisations like the Olympic Games, which bought coverage that included pandemics and would receive a payout.
Other policies explicitly exclude pandemics while there is some uncertainty around so-called silent policies that do not specify. “The question is how large is this exposure and how big will the losses be?” Ramseier said.
He noted that the base case consensus was for the global insurance industry to lose between $US20 billion and $US40 billion, split between primary insurance and reinsurance, which Ramseier said equated to losses that occurred from a mid-size US hurricane.
And, while there has been speculation that some governments may retroactively include pandemic coverage in business interruption policies, Ramseier said it was a “very remote” possibility.
Even so, the losses will wipe out 2020 profits for certain companies, he said. It is also expected to trigger a wave of capital raisings that has already seen QBE and Hiscox tap the markets in the first quarter.
Reinsurance premiums are also likely to increase significantly, Ramseier said. The impact of which will flow through to the insurance-linked securities (ILS) market.
“There will be losses in private ILS transactions in our view,” he said. “People invested in private insurance-linked securities portfolios will have losses due to COVID-19, particularly in quota share and sidecar transactions.”
But Ramseier said there will also be opportunities to make money including from Catastrophe bonds that will likely see minimal impact from COVID-19.
He added that contracts and the structure of the CAT bonds typically do not cover business interruption due to pandemic and the spreads had started to widen.
“If premiums go up in the underlying reinsurance market, then CAT bond spreads will also rise,” Ramseier said. “It’s a good place to be.”
He also likes insurance bonds and said valuations among insurance stocks had started to looking compelling after the market sell-off.
“Solvency ratios of insurance companies are solid and there is minimal risk of coupon deferral or defaults,” he said. “Yields are among the highest in the universe of investment-grade bonds…If you are selective there are opportunities with significant upside.”