Covid-19 brings uncertainties to ILS asset fair valuations: Horseshoe’s Crozet

With valuation of insurance-linked securities (ILS) and collateralised reinsurance investments already a process that requires significant expertise, the threats posed by the Covid-19 pandemic add more complexity to setting fair valuations, Horseshoe’s JB Crozet told us.

JB Crozet is Senior Vice President of Advisory Services & Head of the London Office for Bermuda-headquartered specialist ILS, insurance or reinsurance management and fund administration, servicing, and risk transformation specialist, Horseshoe.

With one of Horseshoe’s key service offerings being the fair valuation of ILS funds and other similar reinsurance investment portfolios, we discussed how the ongoing global Covid-19 pandemic may make that process more challenging going forwards.

“In many ways, Covid-19 epitomizes the challenges we can face when producing fair values for ILS assets,” Crozet explained to us in an interview.

Saying that the pandemic means, “There is uncertainty on the primary coverage, uncertainty on the aggregation mechanism and even uncertainty on the legal enforceability of contractual terms.”

Which means the processes used to value ILS investments need to be incredibly robust and able to deal with the challenge posed by uncertainty, factoring in the potential for Covid-19 to hit the underlying ILS and reinsurance positions a fund carries exposure to.

Crozet said that at Horseshoe, “We will approach the valuation process by making the best use of the information available, leveraging whatever market and cedant analyses are available to us and converting them into a framework to quantify the impact on a specific portfolio.”

“This process will enable us to produce a risk-based segmentation of the portfolio,” he went on to explain.

Highlighting the importance of deep-diving into individual contract terms saying, “Covid-19 could be more “peaky” than a hurricane or an earthquake, with some contracts bearing the full brunt while others, for instance those with peril-specific triggers or covering residential business, are spared.”

It’s all about “capturing the uncertainty in the valuation of ILS fund positions,” Crozet said.

But he acknowledged that this process is going to be particularly challenging, not least as the pandemic is an unprecedented event in all of history, not only to those in the ILS market.

“At this stage, the unknown is a bigger driver of value than the known,” he explained.

Quantifying and putting a value to the unknowns that threaten ILS and reinsurance positions is the value-add that a specialist like Horseshoe can bring.