ILS fund managers and reinsurance companies both need to demonstrate they can deliver the returns their investors are expecting, as it is clear that in 2021 “capital is not coming in at any cost,” according to Luca Albertini, CEO of London-headquartered Leadenhall Capital Partners LLP, a subsidiary of MS Amlin.
Speaking to Artemis in a recent interview, Albertini provided his view on the state of the market and highlighted the need for discipline to persist.
“I think the industry has maintained some discipline as rate increases have been seen even with fresh capital entering the market,” he explained.
But this discipline must stick, as the market has targets to hit in order to satisfy its capital providers.
This goes for both the insurance-linked securities (ILS) side of the market, as well as the traditional reinsurance, Albertini feels.
Saying that, “It is clear that capital is not coming in at any cost and so both ILS managers and reinsurers need to deliver on the return expectations of their investors and so they are pushed to maintain discipline.”
Discipline so far has helped sustain the rate increases, which has resulted in attractive opportunities for Leadenhall Capital Partners to deploy more capital, its CEO said.
“In 2021 we have seen a continued pricing improvement for non-life insurance linked investments exposed to property cat business. In our life and alternative credit business line we have identified attractive investments and have grown our AUM in the space,” Albertini commented.
Further explaining that the life side of the industry has been a particular area of success for Leadenhall in recent years, “We have funds and managed accounts dedicated to life and alternative credit. I would not say they are “more attractive” as they are a very different investment proposition, with a medium term tenor and embedded illiquidity.
“Some of our investors in our life strategies do invest into our non-life strategies as well and some of our funds can invest in a mix of life and non-life insurance linked investments.”
Market conditions differ by product
Overall, the pricing dynamic has differed across the different segments of the ILS market, with return prospects on the rise for many ILS strategies as a result.
Albertini provided some colour on how the market has developed through 2021 so far.
He said that, “Each market segment has its own pricing dynamic, which is why it is important to have strategies that can play across these segments to manage the portfolio taking advantage of any trend.
“Catastrophe bonds have shown a relatively good performance and as such there is growing demand for them which is starting to reflect in the pricing.
“Collateralised reinsurance has benefited from the pricing trends of traditional reinsurance and is now offering additional return potential.”
But not every segment of the ILS market has seen fund managers able to attract capital in the same way this year, with some segments more challenging than others.
“The retro market has seen less investor capacity and less demand at the riskier layers level, with more remote layers being more in demand,” Albertini said.
Adding that, “Aggregate covers (whether in collateralised reinsurance or retro) have shown poor performance in the last few years and this is reflected in higher premium increases, which however have not managed to attract back capital.”
Renewals should be positive
Looking ahead to the fast-approaching and important year-end reinsurance renewal season, Albertini sees scope for the market to remain firmer and for some additional rate increases to be seen.
Albertini explained that, “After the June renewals the market was discussing entering a more stable phase following a period of hardening pricing and terms and conditions. There has been more capital coming in, but underwriters have shown greater discipline. Since then, we have seen a major loss affecting European carriers, some of them delivering losses to reinsurers for a second year in a row (assuming some Covid claims and some creep we have seen in the region) which we expect will have an impact on the renewals for the region.
“On the US renewals there is further scope for rate adequacy and adjustments for individual cedants due to some of the creep still being experienced for 2017 and 2018 events.
“This is of course subject to no other major event occurring between now and January and no major surprise arising out of the assessment of the Hurricane Ida loss.”