2018 rate increases, asset class benefits, drive ongoing ILS investor demand

While many have expressed dismay at the depressed state of reinsurance rates, following the major hurricane and catastrophe losses of 2017, for some the modest price increases achieved are deemed sufficient to drive higher returns, both in ILS and for some traditional reinsurers as well.

The fact is that even smaller rate increases in areas that are core to ILS investment strategies can have a significant additive effect to portfolio returns across the rest of the year, hence the appetite of ILS investors to continue allocating more capital over the course of 2018 so far.

This increased appetite to deploy capital into ILS and reinsurance is best evidenced by the growth in total ILS and reinsurance linked assets of managers and funds included in the Artemis Insurance Linked Securities (ILS) Managers & Funds Directory, which has increased by almost 24% during 2018 so far, from $80.8 billion as of the start of this year to now detail ILS managers holding over $100 billion of ILS assets.

But return potential is not the only factor that continues to drive demand to enter the ILS asset class, or to upsize their allocations, from major institutional investors.

The benefits of the asset class for major institutional investors remain clear and are drawing them in increasing numbers to investigate the insurance-linked investments sector.

With the low-correlation to broader financial markets and other asset classes, as well as the diversifying nature of allocations to ILS, remaining the main drivers for investors to allocate to the ILS space.

The higher returns possible are also proving attractive to some reinsurers, particularly those larger and diversified enough to be able to bulk up on higher priced peak catastrophe zones.

The world’s largest reinsurance firms all grew their books at the key 1/1 renewals and most did so again at the mid-year, as they sought to take advantage of underwriting a book with higher return potential.

This has also attracted savvy investors to the space, although in 2018 we understand that the lions share of inflows to the ILS sector have actually come from established investors already allocated and now experienced in dealing with losses.

This new-found experience, of the process through which ILS fund managers deal with and reconcile major losses, has gone better than many end-investors expected, according to a number we’ve spoken with, providing them with greater confidence in the asset class and the fund managers they allocate to.

Having gone through the losses, seen the way they are dealt with and now understood that trapped collateral and impaired assets are perhaps not something to be overly fearful of, some of the longer-standing investors in ILS have been upsizing on their commitments to their fund managers.

In fact, we’re told that there have been numerous cases so far this year where ILS fund managers have had to turn down new allocations from existing investors, who encouraged by the better return potential of the portfolio and the experience gained after the losses, are in some cases keen to upsize their investments to levels that the market cannot currently support.

As ever, supply of risk is required to satisfy investor demand and here the market, while growing strongly, is perhaps not yet able to reach a size to satisfy everyone.

Hence it is key for the ILS market to identify where the next phase of ILS market growth is coming from and how to unlock that next growth spurt, to provide the capacity to accommodate more investor inflows to the space.

We’ll be focusing on how the ILS market unlocks the next phase of growth at our next New York conference, ILS NYC 2019. Tickets will be on sale soon, so please save the date of February 1st 2019.

The portfolio managers of the Amundi Pioneer ILS strategies explained the recent increase in interest in ILS investing well recently.

Saying on pricing that, “Even modest rate increases can potentially translate into meaningfully higher returns for ILS.”

While on the benefits of the investment opportunity they noted, “Not only did the market demonstrate resilience, with no notable capital withdrawal, but the reduced valuations from the challenging year appeared to attract demand for ILS from opportunistic investors. Reinsurance risk remains attractive to investors due to the low correlation of the asset class with other financial asset classes. In addition, ILS investments lack the interest-rate sensitivity that weighed heavily on other segments of the global fixed-income market over the past six months.”

With higher ILS return potential, a better educated investor base, opportunity for some, and still the core benefits of the ILS asset class remaining, the demand from investors to allocate to ILS funds and strategies is expected to remain strong.

Now the ILS market just has to find out how to deliver on that demand, making efforts to expand risk transfer penetration, secure and underwrite increasing amounts of catastrophe and other risk a major focus for the future.