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Bullish on private ILS, but cat bonds may grow fastest into 2024: Ruoff, Schroders Capital


While the catastrophe bond space is expected to continue growing, due to its track record and performance, Stephan Ruoff, Global Head of Schroders Capital ILS is also bullish on private ILS transactions, although acknowledges that investors will want to see a period of improved returns from this segment of the ILS market.

stephan-ruoff-schroders-capital-ilsSpeaking with Artemis in an interview around the 2023 Monte Carlo Reinsurance Rendez-vous, Schroders Capital ILS Head Stephan Ruoff discussed the state of the insurance-linked securities (ILS) market and gave us his outlook for different segments.

Ruoff noted that the catastrophe bond market has performed particularly well and that now, with the higher spreads available, it could be primed for further growth.

However, other areas of ILS have faced more difficulties and still have work to do, to prove out their investment thesis to investors.

Ruoff began by explaining that, “The insurance-linked securities (ILS) market has faced significant challenges in recent years, largely due to the increased frequency and severity of natural catastrophes since 2017. As a result, the performance of ILS in general has been below expectations, especially for the collateralized reinsurance and life ILS segments of the ILS universe.

Going on to say that, “For ongoing investor stickiness and long-term ILS market growth, we need to see improved performance, especially in the private spectrum, collateralized re, of ILS, not only in one year, but in a sustainable way over several years.”

However, conditions are now much more favourable and Ruoff noted that improvements have been made to the reinsurance and ILS product that should help to deliver better returns for investors.

“We have observed a fundamental shift in the risk transfer market with significantly improved terms and conditions,” Ruoff explained, adding that, “Underwriting discipline will lead to sustainable positive returns for investors.”

On the prospects for overall ILS market growth, Ruoff is positive.

“We generally expect the ILS market to further grow as it has become an indispensable element of the entire risk transfer market,” Ruoff said.

Adding, “Demand for reinsurance capacity will further increase due to population and exposure growth as well as inflation and also because of withdrawal of some risk takers in certain nat cat perils – this will fuel the ILS market.”

But he recognises that the private ILS and collateralized reinsurance side of the market continues to be slower to regain investor attention.

Explaining that, “Recently we have seen growth, due to the relative better performance over private transactions, in the cat bond space, and we expect that growth to continue.”

But still remaining positive on the private side of the ILS market, saying, “We are however also bullish on private transactions and our broader ILS strategies as these benefit from improved terms and conditions reinsurance, retrocession and cat on D&F.”

But the cat bond market looks extremely positive at this time and while capital flows have tightened spreads somewhat, Ruoff believes the cat bond market’s traction can continue.

“We have experienced net inflows in the cat bond space which have resulted in a spread tightening,” he said. “However, spread levels are still at a significantly elevated level compared to the past decade.”

Going on to tell us that, “The cat bond market has the potential to grow further due to its long term track record for investors and the appeal for sponsors to access balance sheet capital.

“It may remain the fastest growing segment going into 2024.”

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