Big ILS funds actively raise capital, collateralised Re focus grows: Aon

The largest insurance-linked securities (ILS) fund managers are actively raising capital at this time, which increasingly will be diverted to collateralised reinsurance as focus on that product grows, according to broker Aon Benfield.

Speaking to the media at the 2016 Monte Carlo Reinsurance Rendez-vous today, executives from the broker discussed the continued potential for ILS market growth, albeit not at the rate seen over the last five years.

Paul Schultz, CEO of the brokers investment banking and ILS focused Aon Securities unit, explained that the larger investment managers in the ILS space are actively out talking to investors about raising new capital and accepting inflows, as their relevance in the insurance and reinsurance markets increases.

The ILS market has grown much more rapidly in collateralized reinsurance over the last two-years, as catastrophe bond issuance has stagnated a little, largely due to market forces, competition and renewal trends.

Aon Securities released its latest ILS market report a few days ago, in which it revealed that the ILS market had grown 10% in a year to reach a record size of $75.1 billion.

“The growth year over year has been primarily due to collateralized reinsurance,” Schultz said.

This trend is expected to continue, Schultz explained, saying that “Fund managers are actually going out to their investor base and saying it’s going to be easier for us to grow on a collateralized reinsurance basis than a cat bond basis.”

As well as some ILS deals turning to traditional capacity, as large reinsurers offer pricing and terms that a 144A cat bond cannot compete with, another reason for the cat bond market’s stagnation, in terms of size, has been that a number of deals have not even been renewed as ceding companies have elected to retain the whole layer of risk instead of renew it.

That’s due to the ongoing centralisation and rationalisation of reinsurance buying, which resulted in some higher retentions at large primary insurance players.

“Cat bond pricing points have not been comparable to collateralized reinsurance,” Schultz said, explaining why the continued shift in the ILS product mix is likely to continue.

Cat bonds have their role to play but while reinsurance rates remain so soft ILS market growth looks destined to be in collateralized reinsurance for now.

“The large managers are actively raising capital, we think that will manifest itself in the way that new activity will come into this market,” Schultz continued.

Schultz said that the “outperformance of ILS compared to virtually all other alternative asset classes” is the reason for the ongoing investor interest and the ability of ILS funds to raise more capital.

Additionally there has been more capital going into quota shares, with collateralized reinsurance sidecars increasingly growing in capacity as well.

However, overall there is slower growth currently in ILS, given the state of the reinsurance market and competitive forces, Schultz said.

The trend has changed though, as the larger ILS managers “start to be more active with capital raising” when last year it was perhaps the smaller to mid-tier ILS fund managers that were raising new funds.

But perhaps most importantly, Schultz sees opportunity to deploy this new capital, as he predicts ILS will move beyond pure peak peril catastrophe risk increasingly, with specialty and casualty not out of reach.

That should enable ILS managers to grow further, become even more specialised and to target new investors and raise more capital from existing ones.

Read all of Artemis’ Monte Carlo Rendez-vous coverage here.