Swiss Re Insurance-Linked Fund Management

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ILS capacity constraints continue, but not for everyone


Constrained levels of insurance-linked securities (ILS) capital remains a feature of the market as it moves into 2020, in some cases affecting the ability of cedents to secure the coverage they needed at the recent renewals.

cash-squeezeOf course the renewals continue, to a degree, as the market is still in some cases working through the finalisation of all covers, in what proved to be a very late January reinsurance renewal season.

But now the market is setting into January, it’s apparent that the availability of capital and capacity to deploy remains a key factor in the ILS and collateralized reinsurance market. But this issue is not evenly felt, with some in much better positions than others and some areas of the market faring better than others as a result.

It was reinsurance broker Willis Re that was first to say that while capital levels remained constrained in the ILS market, due to continued impacts from prior year losses and trapped collateral, some ILS funds managed to raise fresh capital for the January 2020 renewals, putting them in a better place to take advantage of the available opportunities.

While ILS capacity growth was seen to broadly stall over the last year, the renewals saw some opportunities for funds to add new capital.

“A small number of ILS funds showed organic capital growth and could therefore gain access to new retrocessional and specialty business at improved prices along with traditional reinsurer capacity,” Willis Re’s Global CEO James Kent explained.

Some ILS players have faced having more collateral trapped in 2019, as the impact of accident year losses added to their funds already trapped from prior years and prior year related loss creep.

This means some ILS funds entered the January 2020 reinsurance renewals actually with less deployable capital than they had in either of the two previous renewals, but that wasn’t the story for everyone.

Pockets of growth have been seen, in particular among some of the ILS funds that have access to robust fronting relationships or their own rated carriers which can help them to avoid most of the issues of trapped collateral.

Although still, these ILS funds have not been seen to grow significantly we hear, preferring to get through this renewal and see how the rate situation was over raising capital and risking depressing rates.

Willis Re further explained on the capital raising situation in its recent renewals report, “New fund raising has proved difficult for existing ILS managers and even more so for new ventures, with negative investor sentiment and poor results being the main reasons for lack of new capital coming into the space.”

The quota share reinsurance area of the market does seem to be one space where capital raising has been more meaningful, with a couple of significant capital raises coming to light just last week.

One of the ILS fund managers that successfully raised capital was quota share focused Tangency Capital, who as we explained secured investor inflows to lift its assets under management by 50% to around $400 million.

Another, even more significant, capital raising of note was from Stone Ridge Asset Management, which reported that it raised around $1.5 billion of new funds and commitments for quota share reinsurance investing for 2020, with this capital to be deployed in a new private ILS fund strategy and to include some non-catastrophe risks as well.

Finally, away from quota shares, we reported recently that Hudson Structured Capital Management has also raised fresh assets, lifting its reinsurance and ILS related AuM to $2 billion in at the end of the year.

Also Bermuda based manager Pillar Capital is another that has experienced further fundraising success, lifting its assets almost 70% during 2019.

These are not the only examples of ILS fund managers lifting their asset base either.

There are fresh assets coming to the ILS market through a number of new vehicles as well, as plans for new strategies to connect capital markets funding more directly with sources of insurance and reinsurance risk continue to proliferate. We’re aware of a number that should launch in 2020, market conditions permitting.

At the same time, we understand from sources that there could be fresh activity in the Lloyd’s market from existing ILS fund players that may both increase assets in the reinsurance sector, but also target them more broadly at specialised classes of shorter tailed business.

In addition, some of the bigger reinsurers continue to increase their use of alternative capital, within funds and sidecar structures, all of which is bringing more ILS capital into the space, albeit masked behind their enormous balance-sheets.

We’ve yet to get clarity of how ILS assets under management moved at some of the largest players in the market, especially those focused on the lower-volatility, higher levels of reinsurance towers.

There is a good chance these ILS managers, while perhaps experiencing some more losses through the second-half of 2019, in particular from the Japanese typhoon activity, may also have been able to raise some fresh funds and commitments, at least from existing investors in time for the January reinsurance renewals.

Looking ahead, the fact money has continued to flow in some pockets and been raised afresh in others, bodes well for inflows to recover more widely across the ILS fund market as 2020 persists.

If the reports are accurate and reinsurance as well as retrocession rates continue to firm up through the April and mid-year June/July renewal seasons, while at the same time activity in the catastrophe bond market continues to be buoyant, we’re likely to see more growth returning to ILS fund managers and an uptick in overall sector assets under management.

We have details on many ILS investment fund managers in our Insurance Linked Securities (ILS) Investment Managers & Funds Directory that currently features managers with more than $100 billion of ILS assets under management.

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