Reinsurers embrace various approaches to ILS participation: Aon Benfield

Reinsurance companies are accessing a greater volume of alternative capital through actively managed vehicles, while the collateralized reinsurance, industry loss warranty (ILW) and quote share reinsurance sub-sectors highlight ongoing ILS market growth, according to Aon Benfield.

“Over the past few years, the number of reinsurers accessing alternative capital through actively managed vehicles has grown substantially,” says Aon Benfield, in its September 2016 insurance-linked securities (ILS) market report.

At the same time, the collateralized reinsurance market has recorded impressive growth, the ILW sector continues to see a solid flow of capacity and quota share sidecars continue to be established, all of which has helped offset the decline in catastrophe bond issuance to ensure the ILS space continues to expand.

In fact, analysis from Aon subsidiary, Aon Securities earlier in the year noted that in 2016 alternative reinsurance capital had grown its share of the overall reinsurance market pie to $75.1 billion, an increase of 10% on the previous year.

So it’s apparent that investors and sponsors remain attracted to a variety of ILS market features and approaches, despite returns in the majority of insurance and reinsurance-linked business lines being compressed in response to the softening landscape, which is also having a negative impact on yields in the ILS industry.

Along with the growth in most areas of the ILS sector, Aon Benfield highlights how the acquisition of CATCo Investment Management by insurance, reinsurance and financial services group Markel, and also the establishment of rated reinsurance vehicle Humboldt Re by ILS investment manager Credit Suisse Asset Management (CSAM), supports the trend of ILS funds looking for new growth strategies.

Furthermore, and as discussed by Artemis numerous times, Aon Benfield underlines the desire of ILS to get closer to the original source of risk in an effort to increase efficiency and broaden access, discussing Nephila Capital’s establishment of its own managing general agent (MGA), Velocity Risk Underwriters, as an example of this.

Turning the focus to reinsurers’ utilization of actively managed vehicles to access alternative reinsurance capital, Aon Benfield notes some drastic changes in the sizes of these vehicles in the past calendar year. Hiscox’s Kiskadee investment Managers, Everest Re’s Mt. Logan Re vehicle, and Validus Group’s AlphaCat Mangers all increased their assets under management (AuM) during the 12-month period, ending June 30^th 2016.

“The trend of reinsurers seeking to compliment underwriting results with an asset management strategy continued in the period under review, albeit at a slower pace that was not without challenges,” said Aon Benfield.

The broker’s ILS market report cites hedge fund style reinsurance start-up Aligned Re from Enstar Group, and also the launch of total-return reinsurer start-up Harrington Re, from AXIS Capital Holdings and Blackstone, among others, as examples of reinsurers utilizing an asset management strategy that incorporates alternative capital, a trend that is expected to continue in the future.

“However, challenges continue to plague some initiatives in the current underwriting, economic, and regulatory environment. On the underwriting side, recent start-up reinsurers have typically produced higher loss and expense ratios in an e ort to achieve top line growth. Along with poor investment returns, this has resulted in start-up reinsurers performing significantly worse as a group compared to traditional reinsurers,” explains Aon Benfield, continuing to note the winding down of PaCRe Ltd.

During the 12-month period under review, collateralized reinsurance was the largest growing sub-sector of the ILS space, driven largely by reinsurer-backed ventures and internal mutual funds, as was the case in the previous 12 months, says Aon Benfield.

The ILW marketplace continues to see capacity flow into the sector from both traditional and alternative reinsurance sources, resulting in an increase in transaction volume at both the January 1^st and June 1^st 2016 renewals, when compared with the previous year.

The majority of reinsurers now work with ILS capital in some form or another, with some clearly being more active and willing to utilize the space than others.

Strategies that incorporate and facilitate increased use of ILS market features and capacity continue to be established and existing models continue to evolve, but it’s apparent that reinsurers are embracing the benefits of the ILS industry, and in return the alternative reinsurance sector seems eager to broaden its scope and access.

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