Higher-risk ILS strategies average ~17% loss from hurricane Ian: Frontier Advisors

Higher-risk focused insurance-linked securities (ILS) fund strategies appear to be averaging losses around the 17% mark after hurricane Ian, according to a report from Frontier Advisors.

Frontier Advisors, an Australian independent investment consultant with an insurance-linked securities (ILS) specialism, has analysed submissions from a range of catastrophe bond and ILS fund managers and put together a useful chart showing how the sector has fared, when it comes to their initial loss estimates for hurricane Ian.

As we explained recently, there is a particularly wide dispersion of losses, as indicated by disclosures seen to date and side-pockets set, with a range of 3% to around 30% seen by Artemis.

Frontier Advisors’ analysis supports that wide range, but also shows some interesting detail on the dispersion of losses from hurricane Ian, across a range of catastrophe bond funds and funds that invest in private ILS and collateralised reinsurance or retroccession contracts.

The image below from Frontier Advisors report shows the dispersion of reported hurricane Ian losses, across catastrophe bond funds, mid-risk private ILS funds and high-risk private ILS fund strategies. Click on the image for a larger version.

Firstly, it’s interesting to note that the average loss reported across catastrophe bond funds is actually slightly higher than the average across mid-risk private ILS fund strategies.

This is likely due to the level of the initial mark-to-market hit to catastrophe bonds after hurricane Ian, which, as we’ve documented, has reduced as loss estimates have come out lower than anticipated from cat bond sponsors in a number of cases.

On these mid-risk ILS funds Frontier Advisors explains of the lower indicated loss than cat bond funds, “This is unsurprising, with mid-risk funds tending to hold less concentrated exposures to Florida and a greater level of peril and geographic diversification.”

Our understanding is that, in addition to the above mentioned by Frontier, for the mid-risk ILS fund cohort, in some cases it is structure and strategy that has mattered and helped them deliver a better result after Ian than might have happened after smaller hurricanes in previous years.

The way some ILS fund managers have addressed their portfolio construction, terms and conditions, as well as fronting and arrangements to mitigate trapped capital, have all been seen to have a positive effect in 2022.

We’re told this is providing some confidence to longer-term investors in the ILS space, as seeing strategies better weathering an industry loss of the magnitude of hurricane Ian is seen as positive for some ILS managers.

Meanwhile, the higher-risk side of the ILS fund market shows a different picture, with some significant losses being reported.

The higher-risk ILS fund average loss from hurricane Ian, from those funds reporting to Frontier Advisors, appears to be around the 17% mark, with two of the strategies reporting initial loss estimates above 25%.

Because of the wide-range of ILS fund or product loss estimates, Frontier Advisors notes that “there is an expectation of increased level and timing of trapped capital.”