The insurance-linked securities (ILS) market is expected to increasingly look to leverage a rated balance-sheet in the future, and in fact the ILS wave over recent years may only have served to highlight the benefits a rated balance-sheet can offer, according to company CEO’s at an event in Bermuda today.
Speaking at the 2016 PwC – S&P Global Bermuda Reinsurance conference in Hamilton, Bermuda today, reinsurance company CEO’s extolled the virtues of the rated balance-sheet and said that the ILS community will likely look to embrace this more in the future.
Kean Driscoll, CEO of Validus Reinsurance Ltd., commented during the panel discussion; “I expect we’re actually going to see the ILS community shift towards rated-balance sheets. That’s our expected trend over the next two to five years.”
“It’s a little perverse if you think about it, it’s all gone into this collateralized market. They’re realising that buyers like rated paper, they like the promise to pay, they like the temporal flexibility, so I think we’re going to see more rated paper,” he continued.
This trend has already begun to be seen, with some of the re/insurer owned ILS funds utilising the balance-sheet and its available leverage to augment their underwriting ability.
As well as this we saw the first rated platforms being launched by the Credit Suisse Insurance Linked Strategies team over the last year or two, with its two Guernsey rated companies Humboldt Re and Kelvin Re helping to add more options for its clients.
This is an important reason for the growing realisation that fully collateralised perhaps isn’t the only way, Driscoll explained; “Buyers aren’t all looking for ILS, or all looking for traditional rated reinsurance solutions. They’re looking for something in between or a blended product.”
Being able to offer a rated solution to ceding companies is becoming increasingly important for some ILS fund managers, particularly those looking to venture further into specialty lines or into more diverse geographies where the peak catastrophe risks may not be so severe and the cedents not so experienced with the collateralised reinsurance product set.
“So I think you’re going to see the lines blur more and more over time. While there will be a number of large independent ILS providers, over time there will be more and more capital somehow embedded within a broader reinsurance mantle,” Driscoll went on.
Joseph P. Brandon, EVP at Alleghany Corp. and Chairman at reinsurance unit TransRe, said that the reinsurers have generally done a great job of providing the ILS product to investors while also benefiting from its risk transfer capacity as well.
But Brandon agreed that the balance-sheet remains important, and said; “Having this collateralized capital has actually highlighted the benefits of a rated balance-sheet, which is not an outcome I would have expected a couple of years ago.”
Speaking to some of the larger ILS managers though, there does appear to be some differences in strategy on this matter.
Some ILS managers accept that rated balance-sheet vehicles may be important to their businesses as they gain in size and scale, helping to broaden their client offering and make them increasingly relevant to ceding companies.
Others, however, are adamant that the fully collateralised model is actually in the ceding companies interests, providing them with access to a cash equivalent source of risk capital, giving greater certainty and enabling them to take advantage of the full efficiencies of the capital markets.
But really what it comes down to is a continuing realisation that the reinsurance business model looks destined to be one of multiple balance-sheets, with third-party investors and the capital markets providing an increasing proportion of the market’s capacity.
Whether that is through collateralised funds, securitised catastrophe bond notes, or a range of fully rated balance-sheets, is yet to be completely defined.
We are likely to see an increasing number of rated balance-sheets utilised by ILS funds, either owned or through partnerships. It does seem clear that we are likely to see an increasing number of ways for capacity from the capital markets to be connected with insurance and reinsurance risks and balance-sheets is just one other way that adds flexibility to the ILS business model.