While loss creep, trapped collateral and the general ongoing impacts from prior year reinsurance related catastrophe losses continue to plague the insurance-linked securities (ILS) market, it’s important to remember that the asset class can still deliver significant value, in terms of investor returns.
ILS and reinsurance linked investing as an asset class continues to increase in profile and popularity, even after the recent losses.
As better educated end-investors continue to allocate to leading managers in the space, with attractive returns continuing to be delivered in 2019 through portfolios unaffected by the prior year loss activity.
It’s often overlooked that there are portfolios being created by ILS fund managers right now that have possibly the best return potential seen in years in the ILS investment market.
Combining the better pricing and returns available in the reinsurance renewals so far this year, with enhanced investment strategies as ILS fund managers put their learnings from the last few years and recalibrated risk model inputs to work, means loss free (or even normalised) outcomes for ILS investors look very attractive for 2019.
We don’t often get a good view of the return potential of current investment year portfolios, but information on Bermuda headquartered ILS fund and investment manager ILS Capital Management Ltd. has come to light and it’s clear that investors allocated to the firms 2019 portfolios are enjoying attractive return performance so far this year.
As of the end of July 2019, an investor that allocated to ILS Capital Management as of January 1st this year could have enjoyed a return net of all fees and expenses through July of an impressive 10.5%.
It’s important to note that such a return would only be possible for an investor that allocated to the ILS fund portfolio at the beginning of the year, so not having any exposure to prior year events at all and only benefiting from returns generated by contracts and investments underwritten by ILS Capital Management for 2019.
It’s also important to note that other ILS managers in the sector will also be seeing attractive returns from portfolios with no legacy linkage to prior years events.
It’s a clear reflection of what is possible in insurance-linked securities (ILS), as a segment that can offer very attractive returns.
ILS Capital Management, like many other ILS funds, has been working to better insulate its portfolios of reinsurance contracts against impacts of major catastrophes in recent months.
The manager has taken steps to reduce its exposure to Florida property catastrophe reinsurance over recent months, despite the improving pricing there.
ILS Capital Management has a more diversified approach than some in the sector, underwriting risks across specialty lines as well as property and catastrophe exposures.
The company reduced the level of capital deployed to Florida ceding companies, while increasing the amount of capital deployed to specialty lines ceding companies, adjusting the mix of the portfolio compared to prior years, with less catastrophe focus in the 2019 book.
ILS Capital Management said that it is managing to take advantage of market conditions at Lloyd’s of London, where the disruption caused due to performance issues has left gaps and opportunity for other capacity providers.
The ILS fund manager said that it has reduced its capital exposure to Florida insurers by roughly 35% year-on-year at June 30th 2019.
Actions taken also mean that the tail risk in the 2019 portfolio is lower than prior years, likely in the main due to a reduction in U.S. hurricane exposure thanks to the reduction in Florida business.
As a result, the managers investors are able to benefit from attractive returns, while the market remains relatively free of large losses, but with reduced exposure to the area of peak risk that threatens the rest of the ILS market.
Offering an interesting, perhaps more diversified opportunity in the ILS asset class, that has attractive return prospects this year.
We have to mention that, of course, ILS Capital Management is not the only ILS fund delivering attractive returns on its 2019 specific portfolio.
Many ILS fund managers are delivering the same, given the lack of fresh loss activity. Combined with the improvements seen in rates, the lack of losses so far this year means that fresh 2019 portfolio investments in ILS funds are so far managing to produce very decent returns for investors.
But, as we said, these returns are also a sign of the value generation possible through investments in the ILS asset class, something that can seem a little forgotten when everyone remains so focused on prior year losses and loss creep.