“Informed” ILS investors willing to increase commitments: Noonan, Validus

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Insurance-linked securities (ILS) investors are “informed” and their lack of naivety suggests an expectation of higher rates in 2018, and many investors in the space have additional appetite despite recent catastrophe events, according to Ed Noonan, Chairman of the Board and Chief Executive Officer (CEO) of Validus Holdings.

Trapped reinsurance and retrocession collateral has become a hot industry topic in the aftermath of third-quarter catastrophe losses, which is expected to be the costliest quarter on record for re/insured losses from natural catastrophe events, and the first major test for the ILS sector.

Industry commentary has underlined the potential for a substantial volume of ILS capital to be trapped, or locked at the key January 1st, 2018 renewals, as loss development continues for the three major hurricanes and other catastrophe events experienced in the third-quarter, essentially mitigating the ability to redeploy and take advantage of any price surge.

While some reinsurance and ILS market experts have suggested the trapped ILS collateral issue might well be overstated, others have estimated that up to $9 billion of collateralised retrocessional reinsurance capacity is either blown or trapped as the market approaches 1/1.

Speaking during the Validus third-quarter 2017 earnings call, Noonan discussed the sophistication of the ILS investor base and what they might expect heading into renewals, and also the willingness of many in the industry to replenish and even increase their ILS investment.

“These are informed investors, these are not naive investors and they are going to commit their capital on the basis of an expectation of higher rates for 2018,” said Noonan. “ILS tends to play at higher-end programmes and in the retro market, so our expectation is that there’s no point in the chain that is likely to be a weak link, as far as we can see,” he continued.

A number of industry executives have stressed that ILS investors simply won’t be accepting the same rates as last year, and will be demanding increases alongside the traditional reinsurance players at renewals.

And despite the expectation of ILS capital being trapped, the majority of which for around 18 months, and which the volume is somewhere between 50% and 100% of the original loss, according to Noonan, investors appear willing and able to reload, and even increase their allocation.

“A lot of investors have said we have additional appetite. And, so, I wouldn’t say that we are looking at drinking from a firehose on capital coming in just because people say we have additional appetite.

“So, our best estimate is that the retrocession market may not be fully replaced by January 1st, and I am talking about the market in general. It will get fully replaced but it may be after January 1st, so there might be a delay in the retro market.

“I think the broader ILS market will be hit but not nearly as bad and so will that replenish for 2018 again? Maybe not fully in time, but my expectation is that by, or shortly thereafter January 1st, that market should be fully replenished and perhaps larger,” said Noonan.

He also explained that there are players that have been waiting on the sidelines, who have expressed return expectations and may well enter the space at this point, while some of Validus’ existing investor base is eager to “materially increase” their commitment to the space.

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