Two factors are currently being looked on very favourably by any institutional investors that are researching the insurance-linked securities (ILS) asset class, the stability of an ILS investment managers’ assets over recent years, and importantly how the amount that was actually deployable has fluctuated.
End-investors we’ve spoken with, that are looking to either make their first ILS fund allocations, or looking to increase their allocations to the ILS space, say that capital stability is key.
They believe it provides a good bellweather for how an ILS fund manager has managed its way through the challenging catastrophe loss environment of recent years and how much trapping of capital their strategy has suffered.
As a well as being viewed favourably by investors, ILS managers with stable and importantly largely deployable capital, also stand to benefit the most from reinsurance and ILS market dynamics at this time.
Because market dynamics are currently very positive for ILS capital, given that levels of traditional reinsurance capital have fallen across the industry, while many reinsurers have also been pulling-back from property catastrophe exposed business.
Add in the shrunken retrocession market, and those with capital available to deploy that has an appetite for catastrophe exposure, stand to benefit from opportunities at the next rounds of reinsurance renewals, it seems.
But it’s not just the availability of risk opportunities that makes now a good time for an ILS manager to have a largely deployable and stable capital base.
The opportunities presenting themselves at this time also allow ILS managers to move up into more risk-remote layers, while still sustaining rates-on-line, given the hardening of reinsurance pricing and the improvements in terms and conditions.
Those ILS managers that have been able to stabilise their capital base, while also having freed their trapped ILS capital as well, have been in very strong positions through the mid-year renewal season and will enter the end-of-year renewal negotiations in a positive position to be able to offer ceding clients what they want, a strong, reliable source of risk capital.
At the same time as the opportunities to deploy capital have been improving, while the traditional market has shied away from catastrophe risk and its overall capital base fallen, the demand side is also growing.
Which means, for well-positioned ILS fund managers, there is a clear opportunity for some growth at this time.
Which is again where the investor motivation side comes in, as those managers with a stable and largely deployable capital base are now best-positioned on both sides of the equation.
Best-positioned to attract new inflows and also to find the opportunities to deploy them into profitably.
Of course, none of this is a guarantee of performance, meaning even those ILS fund managers that are considered best-positioned right now, still need to evidence how they will put that advantage to work, while delivering the returns investors are seeking, or performing as projected through periods of loss activity.
While we’ve seen some shake-out in terms of investor allocations and preferences over the last year or so, it is over the next couple of years that investors will really get to analyse how ILS fund managers strategies perform, compare their returns and see how disciplined they have been through this period of hardening reinsurance prices.