Expect another reload if 2018 produces losses: Michael Popkin, JLT Capital Markets

ILS investors will be just as quick to replenish lost capital in the aftermath of major catastrophes, should Hurricane Florence and other losses hit the market in 2018, according to Michael Popkin, managing director and co-leader of JLT Capital Markets.

Speaking to Artemis in Monte Carlo he dismissed the notion that investors might be more cautious in the aftermath of last year’s disappointing rating environment and issues surrounding loss creep.

“We see a lot of volatility in the macro environment, whether in Europe, the UK or elsewhere,” he said. “And that non-correlation story is going to continue to be an even stronger one going forward.”

“You have an uncorrelated asset class, you have a volatile macro geopolitical environment and it’s cat risk,” he continued. “So the fact you have something two years in a row doesn’t mean the overall environmental potential for big storms increases.”

“If anything, it just increases the opportunity because at some point you have some rate adjustment overall. It may not be as long or as high [as hard markets in the past] – or it may be – depending on what the storms look like.”

Popkin thinks the way capital flowed back into the sector in the third and fourth quarters of 2017 following Hurricanes Harvey, Irma and Maria and other major losses is a very good indication of how ILS has taken the volatility out of the property catastrophe reinsurance sector.

“Last year was obviously a very good test and the ILS market passed with flying colours,” he said. “We used to say the money leaving is going to be crushed by the money coming in and that was definitely the case.”

“You’ve got a way for capital to come into the market a lot faster and a lot easier,” he said. “But the bigger question is how do we get more risk into the market overall? We still have a supply demand imbalance and the ability to raise capital outstrips the ability to have the desire to transfer that risk overall.”

He noted that some cedants views on how much risk to transfer was changing and anticipates private placement catastrophe bonds (or cat bond lite) will continue to grow, in part due to lower barriers to entry for smaller sponsors.

The $84m Florida hurricane-exposed Market Re Ltd. (Series 2018-1) is the latest cat bond lite deal to be structured and placed by JLTCM’s ILS structuring and issuance team.

“Private placement cat bonds have garnered wide acceptance among the ILS investors,” said Popkin. “The private placement allows for a lot more customisation overall. It allows for more movement up and down the program and in many ways more innovation.”

“You’re dealing solely with a dedicated ILS community who understand how reinsurance programmes work in all their various forms, and then you’re taking out a lot of the frictional costs in building the bonds.”

“That’s a way of bringing new cedants to the overall marketplace because the barriers to entry in terms of size is not the same, and it allows you to test different perils,” he added. “The ability to assemble a syndicate of different investors is a little bit different, which again gives you flexibility in terms of what you can put together. This part of the market will continue to grow.”