Anticipating rate movement post-Irma, Dirk Lohmann, chief executive of Zurich-based ILS fund manager Secquaero reveals the company is working with Schroders (its main backer) to come up “with additional offerings that are more focused on just the U.S. risk.”
Speaking to Artemis at the Rendez-Vous de Septembre in Monte Carlo, Lohman said that while Irma would not be as significant a loss as had been anticipated given its west coast landfall, it would nevertheless prove a test for the ILS market.
“There was probably a sigh of relief amongst many market participants, because while it can still be a very significant loss it’s not the same magnitude as Miami might have been. We saw the marks on the bonds on Friday evening from the broker dealers and they were all over the map.”
“I’m just waiting to get an update from my modellers on what they expect the impairments to be,” he added. “I think some of the junior tranches for Florida-only companies are going to be at risk. Although the overall impact, it’s very hard to assess at this point in time.”
At present Irma is expected to cost the industry as much as $40 billion, according to initial loss estimates from vendor cat modelling agencies.
“This is going to hit local companies and national writers,” thinks Lohmann. “If you look at the overall situation in the market it now looks to be an earnings event for the reinsurance industry, and it will seek some form of compensation for that. They’ve been pushing for rate increases when there weren’t any losses and they may be able to get some now.”
Harvey has similar loss projections, although half of these will fall within the National Flood Insurance Program (NFIP). “Harvey is less of an issue for the bond market, because the flood loss will generally fall under the NFIP or the commercial market, and it is a hazard that is generally not in the bonds,” explains Lohmann. “The market took that with a very light shrug.”
“The Mexico earthquake was just a binary payout,” he adds. “The market has written it off. It’s a loss, people will take it and then they will move on.”
However, echoing other experts at the conference in Monte Carlo he questions whether uncertainty surrounding losses from Irma will tie up capital through buffer clauses during the upcoming renewal season. “We’re not through the seasons yet and the Gulf is going to warm up some more, so it will be a more pronounced year with regards to losses and aggregate.”
“If we look at Harvey and Irma together its maybe $50 or $60 billion – it’s not immaterial,” continues Lohmann. “Also some of the money that’s going to come in new will expect a higher return. So it’s in the hands of the managers that take that money that they deploy it with discipline and work to manage the expectations of the investors.”
The decision to offer new investment opportunities targeting US nat cat was made in response to high levels of investor demand, reveals Lohmann. “They have called and asked whether Irma is a market-changing event and they are giving consideration now to whether they should top up.”
“In general there will be a large segment of the market, that is already in the market, who see this as an opportunity. There will also be a number of investors who understand the investment case, but think that right now the yields are too low. They might take a different view post event.”
“Then there are some that came into this industry because they were hungry for yield and now they see that yield also has risk,” he adds. “So there will be some swings and roundabouts. But in the main the market will be well positioned to provide capacity and solutions… all the talking heads here are saying that.”
“We’ve had a number of RFPs from investors who are not yet allocated and who are monitoring the sector, so the interest is there.”
In addition to opportunistically responding to the 2017 hurricane season, Secquaero continues to explore more diversified risk options for its investor base, Lohmann reveals, particularly within life ILS. Pension funds investors are receptive to a longer duration asset class, and consider mortality a natural diversifier for their longevity risk, he says.
“We’re in the process of developing some new products that are focused on life insurance. We’re not ready to make a formal announcement but we will be coming out with some products that are focused on long-term financing of value-in-force and the investor response to these types of concepts has been very favourable.”