Jan 1 deployable ILS capital could be down, but market trajectory positive: Speakers

At the upcoming January 1st 2020 reinsurance renewals the amount of ILS capital available for deployment could actually be slightly lower than a year prior, but the market looks increasingly healthy and the trajectory is positive, expert speakers said yesterday at a conference in Bermuda.

During an alternative capital focused panel session held at the S&P Global Ratings 2019 Bermuda Reinsurance Conference yesterday, speakers said that the insurance-linked securities (ILS) market continues to work through the issues posed by consecutive heavy catastrophe loss years.

But all agreed that the longer-term prospects are looking increasingly positive, not least as the ILS sector is learning from the losses it has had to pay.

Aditya Dutt, President at Renaissance Underwriting Managers, part of the Bermudian reinsurance and third-party capital manager RenaissanceRe, explained, “In 2020 there is a bit of clean-up to do. As an industry we’ve got to get better at reporting, communication, governance all for these things should improve.

“Once the industry absorbs those lessons from the last year and the year before, I think there’s no lack of growth here.”

Rick Pagnani, EVP and Head of Insurance-Linked Business at asset management giant PIMCO LLC, noted that the upcoming renewals could be challenging.

“I think Jan 1 is definitely going to be tough, but I think as the year goes on we’ll see a shift in terms of capital flows,” Pagnani explained. “Probably a slight decline at Jan 1 and then we’ll see an uptick over the course of 4/1 and 6/1, that’s our anticipation.”

Des Potter, Managing Director, ILS Origination and Structuring (London) at GC Securities, a division of reinsurance broker Guy Carpenter, also noted that the immediate outlook could be one where less capital is immediately available.

“The ILS market is going through a pause at the moment and it wouldn’t surprise me if not only the AUM, but the deployable capital more importantly, at January 1 is probably down on what it was at January 1 2019,” Potter explained.

With the ILS market likely to bear some of the brunt from the recent Japanese typhoon losses and the likelihood that this will trap more retrocessional capital in the ILS space, the fact deployable capital could be down is not a significant surprise at this stage of the year.

Potter too has a more positive outlook though, saying, “I think the fundamentals for why investors are investing in this asset class are still as strong as they were before, and I do think we’ll see a resumption of the growth trajectory of ILS in the latter part of 2020.”

As the ILS market deals with its losses it is working to put in place more robust processes to provide enhanced levels of information and transparency to its investor base.

It’s encouraging that fund managers are working to build back after the series of losses a stronger and increasingly institutional quality asset class that investors are now demanding.

This does bode well for future growth, but it remains a period where differentiation is going to be key, not just in how they access risks and which risks or cedents they choose to underwrite, but also in how they seek to carry their strategies forwards.

Dutt also explained, “I feel like for the past five or six years we’ve taken a couple of things for granted, one of those is that pension plans will recapitalise no matter what.

“This has clearly been proven to be untrue and investors are making a decision based on economic value and that’s the rational thing to do.

“It’s an important realisation in the market, that you have to treat your investors with some care, or they might actually leave you one day.”

He also provided his view looking ahead to 2020, “Next year, I think there’ll be a little bit of growth, probably some withdrawal and some shake-out, but pricing should reflect that.”

Potter agreed and gave a little more colour on how investors may be looking at the opportunity going forward, “It’s ironic if you think that when ILS capital began to come into this sector in a meaningful way, you’ve probably got a better underwriting environment coming up in 2020 than you’ve had in all this time capital has been coming in.

“But these investors are long-term investors and the renewal cycle in reinsurance is very much secondary, to their decision that they are allocating their capital to the right manager and the right strategy.

“They’re not motivated about having their capital in place for January 1 2020, they’re motivated by making sure their capital is allocated in the right place with the right manager for the long-term.”

Pagnani also gave his projection for the year ahead, “The rate environment we think is an attractive one. We think there’s a secular change in the industry, we see stabilisation and rate increases where there should be rate increases.

“I think we’re on an orderly path towards growth and it’s a good trajectory that we’re on.”