ILS investors reload, as ILS fund managers find post-event opportunities

Investors in insurance-linked securities (ILS) and collateralised reinsurance investment funds are reloading in order to provide ILS fund managers with the necessary capacity to take advantage of attractively priced opportunities that have been presented in the wake of hurricanes Harvey and Irma.

Artemis’ sources said that a number of ILS fund managers have already accepted new capital from their third-party investors.

In the main, this is from existing investors in their ILS funds who have been looking for opportunities to deploy more capital should any opportunities emerge that have a better price for the underlying risk.

Following the major insurance and reinsurance industry losses created by hurricanes Harvey and Irma, demand is being seen for a number of different products which ILS fund managers are able to offer.

New allocations are either being used to provide the replacement and back-up coverage that cedents need, or to enable continuity to be provided where existing collateral may have been, or looks likely to be, locked up.

Back-up coverage, to last until the end of the year, is one area that ILS funds are able to deploy new capital right now, with our sources telling us that pricing has increased as the rate-on-line can be roughly the same as a full-year contract for one that only lasts to year-end.

On a risk adjusted basis that results in a significant price increase, while offering a chance to deploy more capacity that will be freed up at year-end for the January reinsurance renewals.

We’ve heard some reports of interest in so-called dead-cat coverage as well, the buying of ILW’s based on the industry loss outcome of a storm after a storm has hit.

Sources also said that there is some evidence of companies that fear their existing reinsurance will be completely eroded and whether they have reinstatement provisions or not they would like to buy more straight away.

One cedent told Artemis that the ILS fund market has responded positively to the losses, adding that ILS funds seem in many cases to have been able to come back to the market with capacity available in a matter of days. Some said this response has been as quick as the major reinsurers and in some cases quicker.

While new capital flowing into the reinsurance market could be thought likely to soften any price increases, this doesn’t seem to be the case right now.

Artemis understands from market sources that the majority of contracts being written in recent days by ILS funds are at substantial price increases. Either the scenario we mention above of a 3 month contract for the same RoL as 12 months, or a percentage increase on previous price marks for the same programs.

Loss hit programs, particularly those where companies look likely to erode all of their protection, are seeing demands for the highest price increases. Additionally, where collateral has been or is likely to be locked-up, the replacement covers are coming in at higher rates.

We’ve heard of increases ranging from +10% to as much as +50% on these replacement, back-up, top-up and post-event type reinsurance coverages, with ILS fund managers able to deploy some of their newly raised capital into them.

It’s a positive for the ILS market that continuity is being seen. It is vital that ILS fund managers demonstrate that their response to major industry loss event is to support their clients, both cedents and investors, and the evidence from the market is that both sides are being serviced and the trapped collateral issue is not hurting business as usual so far.

We’re told by ILS market players that trapped collateral on the retrocessional side has been considerable, with uncertainty still over the eventual loss on both an industry basis and the eventual toll for individual companies to pay.

We’re also told that the inflows being seen into ILS funds are flowing in with expectations that pricing will be different this time, which so far the ILS managers have been able to deliver for their clients.

ILS fund managers are being careful not to raise too much capital though, as the availability of these opportunities will not last. Inflows are being managed carefully to ensure they can be deployed into opportunities that do not cannibalise returns in any way.

All of these opportunities mean that the ILS fund market could grow by a billion dollars or more in the wake of the recent hurricanes, as we’re hearing of at least five of the larger ILS funds raising some new funds. Across the sector and its growing range of ILS investment managers the total deployed could be rising.

Looking ahead to January, we’re told that ILS fund managers will expect some increases to remain in place for them. However the dynamics of a normal reinsurance renewal season could be different and we’ll have to wait to see whether the opportunities for improved pricing being reported to us are still available.