It’s clear that after the series of heavy catastrophe losses that have struck the reinsurance and insurance-linked securities (ILS) industry since the middle of 2017, some ILS funds are likely to find raising capital more difficult after losses until they have proven their ability to make returns over-time (again).
There are ILS funds out there which are now negative over five years or more, after the losses of 2017 and now 2018 have eroded all of the positive gains made over recent years.
With investors having reloaded their allocations in many cases after the 2017 catastrophe events, in some cases more than once, there is likely to be a period of reflection and assessment required before they’ll be convinced to put much more into the same strategies.
That could make raising new capital after the recent losses very difficult for some players in the riskier layers of collateralized reinsurance and retrocession, especially for those where the long-term track record has been all but decimated by the recent losses.
As we wrote recently, some ILS funds find themselves in a position where they are struggling to renew their core portfolios for key clients, given the impacts of trapped capital and as a result their reduced assets under management.
But the flip side of that predicament is that some will also struggle to reload, potentially exacerbating the situation.
After the rapid reload following the 2017 hurricanes and record annual catastrophe insured losses this may come as a bit of a surprise to some.
But it’s a reflection of the significance of the 2017 losses, the developing loss creep situation from them and the impacts of multiple small to mid-sized losses in 2018, all aggregating into a situation that has put some ILS players in a challenging position.
Not everyone will struggle, of course.
We’re already hearing of some capital raising being put in place for the January renewal season and there are plenty of ILS managers who can replace trapped capital and come out at least level on an AuM basis for January. But there are destined to be one or two who do struggle to raise enough capital to trade forwards at the same scale, at this upcoming renewal season.
We’ve also heard from some market sources who suggest that capital raising may be easier after the January renewals, if pricing rises more than had been anticipated a few weeks ago (now possible after the wildfires).
While some ILS funds and managers may struggle to raise funds after losses in the immediate term, it’s also likely to be more challenging for other managers who weren’t hit so hard as well.
There are plenty of ILS funds who have all but earned back their losses from the 2017 hurricanes and for who the recent events have not been a particularly significant loss, meaning their long-term performance looks much better.
But after the losses investor sentiment is bound to become a little more negative no matter how well you’ve coped and hence the job of fund-raising likely to become more time-consuming and sometimes challenging. Hence us putting some in brackets in the headline here, as it could be a little more challenging for all, but for some it might to get a lot harder.
Of course, the harder the job of raising funds is (ie. the more time required to educate and persuade investors that your ILS strategy is the one), the more sticky that capital can tend to be.
In fact, one of the positive side effects of trading through a period of major losses is that ILS fund managers will have spent significant amounts of time working closely with their investor base, to communicate losses, answer their questions and disclose their plans to trading forwards.
That generates stronger relationships with investors in many cases and this education process is vital to the continued health of the ILS market as investors need to be aware of the risks, but also aware of their fund manager’s strategies for earning back capital lost.