2018 hardening offered ILS investors a time to initiate or upsize: Aon

Insurance and reinsurance industry broker Aon believes the rate rises seen this year made it a good time to initiate or add to an investment in insurance-linked securities (ILS), in light of the potential for firming to be sustained in some catastrophe markets.

In a recent investment research and insights report, Aon highlights the impressive performance of the ILS market over the last decade or so, stating that with the exception of Q3 2017, ILS returns have delivered what investors expected.

The broker explained that generally, ILS returns are stable and positive, although by their very nature can decline sharply when disaster strikes, as was the case in the second-half of 2017 following three major hurricanes, two powerful earthquakes and some devastating wildfires.

But despite the impacts of 2017 events and the subsequent losses experienced by ILS investors, the consequential market hardening provided an opportunity for investors in the space to take advantage of, says Aon.

“The events of 2017 and resulting losses have created opportunity moving forward…This hardening of the market is expected to persist at least through the mid-year 2018 renewal cycle and potentially longer.

“Thus we believe that now is tactically an attractive time to initiate or add to an investment in ILS,” explains Aon.

It should be noted that this commentary went out to the institutional investor market earlier this quarter and of course expectations of ongoing rate increases are now less certain. However the advice that ILS is a good asset class for sophisticated investors to add to their portfolios is what really matters here, especially given the reach of the investment consulting arm of Aon.

Aon stated that yields for its Buy rated ILS managers, those it recommends, were impacted by 2017 catastrophes, with the more aggressive, higher target return managers being down between -12% and -19% for the year.

At the same time, Aon’s recommended conservative ILS funds avoided severe losses, thanks to peril diversification and risk structuring, posting returns of between -1% and -6% for 2017.

“The large North American losses last year have resulted in increases of 10% in premiums for those perils in the most recent year end renewal period. Our Buy rated managers are therefore finding a number of significantly more attractive reinvestment opportunities as they build their 2018 portfolios,” Aon said.

It remains to be seen exactly how sustainable any of the rate improvements seen this year will prove to be in the global reinsurance industry. Despite post-event hikes, these has been reportedly dampened considerably by the presence of alternative capital and the ongoing competition across the sector, most notably in the property catastrophe arena.

However, rates have improved somewhat when compared to last year, so it might well be a sensible, or tactical time to either enter or increase ILS investments in 2018, Aon advises.

The majority of investment consultants have advised clients to upsize on allocations if they can in 2018, to capitalise on post-loss rate increases. Even at flatter levels, such as seen in June, the value proposition of reinsurance as an asset class remains attractive to the world’s largest pensions and institutional investors.

It’s clear investors have been listening to the advise of consultants, as ILS funds continued to increase their assets under management through to the mid-year renewals, with our list of ILS fund managers now commanding close to $97 billion of capital between them.

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