Early Firm Order Terms reflect mid-year renewal firming: Albertini, Leadenhall

The mid-year reinsurance renewal season is set for further firming of premium rates as market conditions help to sustain and perhaps accelerate recent trends, something Leadenhall Capital Partners CEO Luca Albertini says is evident in early Firm Order Terms.

The CEO of London headquartered insurance linked securities (ILS) and reinsurance related investments manager Leadenhall Capital Partners LLP explained that the impacts of the global coronavirus pandemic and resulting shifts in institutional investor allocations, as well as a possible slowing of inflows at this time, would all combine to drive further firming of rates at the all-important June and July 2020 reinsurance renewals.

Speaking with us, Luca Albertini said that the recent adjustments to investor allocations to the ILS fund sector is one factor that will influence the upcoming renewal market environment.

“In the short term we have observed some of the existing investors reducing allocations to ILS with main reasons being the need for liquidity following the turbulent weeks in March, but also to maintain the allocation to ILS within a certain percentage of the total portfolio,” Albertini said.

Adding that, “In the latter case the ILS outperformance has ironically created a short term need to rebalance portfolios and reduce the absolute allocation to the space.”

On top of the investor adjustments in terms of allocations to reinsurance-linked investments through ILS funds, there are also new allocations to consider as the global pandemic has created significant uncertainty for institutional investors about where to put their capital at this point in time.

Albertini explained, “We are aware of some inflow of new capital to ILS which targeted June 1, but in some cases the investment teams could be distracted by current market dislocations and delay.”

These investor-side issues are likely to affect supply of capital while the market dislocation persists, it seems.

“The combination of these factors will sustain upwards pricing pressure for ILS and private placements and the upcoming renewals, and may also delay the launch or the size of new 144a transactions,” Albertini continued.

This supply of capital and investor reallocation issue is driving current reinsurance market trends, alongside the impacts felt by traditional reinsurers to their investment portfolios and the realisation of significant losses across many classes of insurance business.

“On the non-life side we are seeing material impact on a number of classes like the contingency market/event cancellation, trade credit insurance and travel insurance where Leadenhall is not active,” Albertini said.

Overall, these pressures are likely to create renewal conditions conducive to further rate firming, which Albertini said is already evident in the marketplace.

He explained, “We believe that current market conditions will sustain the argument for further premium increase, which we are seeing confirmed in the early Firm Order Terms we are already receiving.”

Adding that, “The arguments for premium rises include the changing view of risk (a trend started well before this pandemic), but coupled with lower reinsurance capital due to a combination of investment losses by the major reinsurers, a reduction in ILS capital available and reinsurers’ reduced reliance on sidecars and retro providers.”

The capital supply issue is likely to be a shorter-lived effect of the coronavirus pandemic and there is already some evidence of an increasing stabilisation of financial markets, as well as interest in the ILS sector being shown by investors.

It may take a while for inflows to resume at a pace, but it’s likely those ILS funds with solid track records and that manage the current market environment and uncertainty well, will be well-positioned going forwards.

Albertini thinks the ILS market has another opportunity to demonstrate one of its key features and attractions for investors, the relative lack of correlation to broader financial markets.

“In 2008, the relative performance of ILS funds compared with credit, equity and a number of alternative strategies proved the value of ILS as a diversifier, and attracted new capital to the sector,” Albertini said.

“If the performance of funds invested in life and those invested in non-life property reinsurance and retrocessional programs continues to show the low correlation to the general market trends, those would be yet again a powerful reminder of the diversification benefits of ILS for investors, coupled with a more attractive reinsurance and retrocessional pricing environment,” he concluded.