Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Collateralized ILS fund capital raising still slower going than cat bonds

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Raising capital into collateralized reinsurance investment fund opportunities continues to be a much slower segment of the insurance-linked securities (ILS) market than catastrophe bonds, which is buoying hopes the hard reinsurance market could be prolonged well into 2024.

tap-money-capital-flowThe catastrophe bond market is even thought to be benefiting from the still slow pace of new capital inflow into collateralized reinsurance and retrocession strategies, we understand.

Layers of reinsurance towers that had been backed with private ILS fund capital for some years now are, in some cases, being shifted to the cat bond market, as cedents look to maintain a level of diversity within their risk capital sources and persist with capital market backing for certain layers of their towers.

While there is uncertainty over how capital flows will move later this year, once the hurricane season draws to a close, and conversations over capital raising are continuing apace, most sources still don’t feel that collateralized reinsurance and retrocession strategies will experience significant growth in 2023.

Meaning any net growth in ILS is seen as most likely to be driven by the expanding, more liquid catastrophe bond market.

Which many believe bodes well for those desiring a continuation of current hard reinsurance market pricing levels into 2024.

Some investor sources suggest that any sign of meaningful softening in private ILS market rates could be viewed as a negative at this time, as investors still want to see higher returns delivered and improvements to terms evidenced.

They anticipate ILS fund managers will look to hold the line on rates, to demonstrate their discipline, saying that this will, in time, provide the encouragement that they need to begin to grow their allocations back into private ILS fund strategies again.

Of course, the same is true of catastrophe bonds and there are investors who believe that market has already softened as much as it needs to (perhaps more in some cases), becoming more cautious on prospects for cat bonds going forwards as a result.

There are others who feel the recent softening in cat bonds is actually just a correction to an excessive widening of cat bond pricing seen previously, rather than a start of softening. It’s going to be interesting to see how this plays out as the year continues and whether price multiples can hold up towards the fourth-quarter, when we’re told that issuance may pick up more meaningfully again.

Swiss Re’s CFO John Dacey recently said at an analyst conference held by Goldman Sachs that ILS funds are not stepping in so far and that the imbalance in the supply of capital into reinsurance is persisting as a result.

Because of this, Dacey feels the hard market cycle can be more persistent this time, with other factors related to inflation, catastrophe and weather losses, higher interest rates and more, all playing into investor motivations and conditions for sustained higher reinsurance pricing.

While rate increases could moderate, Swiss Re’s CFO believes hard pricing we see today can persist at the January 2024 renewals, with the lack of ILS inflows a key support for rates.

Another analyst report, from Berenberg this time, says that “there has been little fresh equity capital raised and little net inflows into the collateralised ILS market,” which is expected to support the hard market for longer.

We’re still hearing of some capital raising successes at the larger collateralised ILS fund managers, but inflows are largely replacing capital that has been trapped, lost, or exited in recent years, and there remains some churn in the investor base as gates for exiting strategies are reached, we understand.

However, while net inflows may not grow the collateralized and private ILS side of the market this year, there is a chance that deployable ILS capital increases further, as we continue to hear of releases of trapped capital, in particular related to last year’s hurricane Ian.

That is helping some ILS funds plan for the end of year renewals with more capital available than they had twelve months earlier, we’re told, so this is a dynamic to watch out for.

Deployable ILS capital has been steadily increasing, as some gets recovered out of trapped situations. This, alongside what capital raising there has been, does mean that by the January 2024 renewals the private ILS market could be larger year-on-year, with more renewal underwriting firepower available to it.

But, capital levels aside, the ILS fund manager community appears very motivated to hold onto the harder rates and pricing for longer, determined to deliver on the returns their investors are seeking after a number of challenging years.

Traditional capital inflows and new startups are an element of uncertainty though, as there are investors ready to fund opportunities, although they do tend to be looking for differentiation, rather than the specialty re/insurer that begins life very catastrophe focused approach we have always tended to see in new “class of” companies.

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