Signs of an impending recession will reaffirm support for ILS as an asset class, in spite of more muted investor sentiment over the past 12 months, according to Luca Albertini, chief executive and founding partner at Leadenhall Capital Parners LLP.
“I was reading in the FT yesterday about potential negative yields on the ten-year U.S. treasury. When you have that it definitely supports markets like ours.”
He said losses over the past two years has been an “educational phase” for the industry, “building a base for stronger and more solid growth” going forward.
Speaking to Artemis on the eve of the Rendez-Vous de Septembre in Monte Carlo, Albertini said that while some investors had got burnt and backed away from ILS, the majority of backers had improved their understanding of the sector and the potential for major consecutive loss years.
“If somebody has been burned because of their bad choice of manager they may try to blame the sector rather than themselves, but I don’t hear any noise of any major shift in investor sentiment away,” he said.
The decisions by Markel to put beleaguered retro ILS company CATCo into run-off along with the reduction in capacity of some other ILS funds is helping to firm up the market.
As reported by Artemis in July, Stone Ridge Asset Management’s AUM shrank by a further 4% at the end of April 2019 to $5.93 billion. This compares to an AUM of $7 billion at the end of April 2018.
“Somebody made the point that capital market investors are used to real time information – they’re not naturally familiar with concepts such as loss creep, so this has been a couple of years of education,” said Albertini.
“Clearly there has been some natural wastage, including the disappearance of a massive fund and competitor. So the capital is going out and that has allowed people to study and help firm the market up a bit,” he added. “And if we kept throwing money at it, this firming up would not have happened.”
“And at the same time, apart from the firming up of rates and terms and conditions, you have the government in Florida trying to address some of the abuses, so there is an improvement there as well.”
Meanwhile, Hurricane Dorian should help focus minds, despite sparing the Florida coast. The storm should remind ILS investors that they should also consider the near-misses in addition to historical loss activity when setting their expectations, said Albertini.
“Even if Dorian is a small event from an insurance standpoint, and it looks like it will be, it’s a reminder to everyone that things can happen frequently,” he said. “The fact that things that have happened and they were near misses is not part of the research that people generally have done, but it should have been. ILS investors now, having life investments, see the dynamics of what happens .”