This third in our series of articles featuring the thoughts of leading figures in insurance-linked securities (ILS) and reinsurance on the market as we move into 2016 features Andrea Cavalleri, Head of Life and Neil Strong, Head of Non-Life at Securis Investment Partners LLP.
We asked for participants thoughts or predictions on the prospects for the ILS market, catastrophe bonds, collateralized reinsurance as well as reinsurance or catastrophe risks as an asset class in 2016.
Andrea Cavalleri, Head of Life and Neil Strong, Head of Non-Life at the specialist London-headquartered insurance and reinsurance-linked securities investments manager Securis Investment Partners LLP, give us their thoughts regarding key market issues in 2016, as well as some insight on new initiatives at Securis.
Their response follows in full below:
Securis Investment Partners LLP was established ten years ago and has a long and consistent track record. Today Securis has circa $3.5bn in assets under management, and operates out of offices in London, Bermuda and Geneva. Securis invests exclusively in ILS, but is innovative, flexible and proactive in originating, analysing and structuring different types of investment opportunities for its investors.
You may well ask, where next for the ILS and 3rd party capital markets? 2015 has seen another year of development and indeed innovation for Securis and the market in which we operate. In November 2015 we launched our own Special Purpose Syndicate 6129 in a new and totally unique structure with Novae. This is now one of three ILS funded Lloyd’s syndicates and we assume that there will be more to come next year, as Lloyd’s affords via its rating, access to business, reputation and capital structure, an excellent environment from which to source business for investors. In addition to the Lloyd’s growth we have also seen one of our peers launch and establish its own MGA platform. All of this suggests that ILS capital is seeking to get closer to the original premium dollar and own its own distribution channels. There has been, and will continue to be, an increasing emphasis on developing new products to help close the ‘risk gap’ and deepen insurance penetration.
As the renewal season ebbs and flows, with its normal trials, tribulations, emotions and indeed occasional highs, we have experienced the proverbial ‘game of two halves.’ A number of protagonists, both traditional and non- traditional, went on the charge early, seemingly to deploy their full allocation as quickly as possible with rate being key. In order to keep rate, disappointingly there was definitely a broadening of cover and a relaxation of terms. Post this flurry of capacity and urgency, a slightly more sedate and disciplined market was allowed to operate. As always counterparty relationship was key, with cedents recognising shareholder value but also very much looking at the longer term with relationships that had stood the test of time and indeed paid their losses. Generally, we experienced mid-single-digit percentage reductions, but these did vary by class and peril. The drive to try and broaden cover and the relaxation of terms is of at least equal concern to pricing and does indeed cause consternation. In pure Cat business, pricing and terms outside the USA was more of a concern. This sector definitely experienced reducing ILS interest though there was still abundant traditional market capacity.
A benefit of the structure and investor appetite at Securis is the flexibility to deploy assets in Life when such investments are more attractive than Non-Life, and vice versa, thus assisting in the creation of a balanced portfolio. On the Life side we definitely saw increased opportunity and indeed demand from cedents as a result of capital requirements driven by Solvency II. This is proving to be a much tougher regulatory regime than its predecessor, Solvency I, and will hit the European life insurance market on Jan 1st 2016, its implementation date. As a result we expect the vast majority of life cedents to suffer from decreased solvency ratios and hence to be seeking efficient ways to boost their capital position. In our view this can be obtained by addressing two of its most “expensive” risks, namely longevity and lapses. This, in turn, is where Securis is able to best flex its muscles by combining capital markets origination and structuring on one hand with in-house actuarial and documentation skills on the other. In addition to the specific Life and Non-Life investments, our Specialty portfolio very much complimented the overall portfolio and in many case was low correlating in being Non Elemental in investment type.
Moving into 2016 and beyond, we expect investor appetite to be pretty similar to current levels. However, with Solvency II as well as, more generally, Securis’ private origination capacities producing increased Life opportunities, investors are beginning to demonstrate an increasing appetite for such exposures. The investor experience clearly depends on loss experience. On the Non-Life side, the continuation of the current benign loss experience should translate into similar returns to those experienced in 2015. As we noted earlier, there will be continued focus on product development as the ILS sector looks to increase insurance penetration and close the risk gap.
Whilst there is now global acknowledgement and acceptability of the ILS sector in both the insurance and reinsurance sectors, prospects for traditional reinsurers remain tough. As has been demonstrated through 2015 reinsurers have been adversely impacted by M&A within the insurance sector – cedents’ preparedness to retain more risk and also look to reduce ceded premium in order to meet return targets is clearly having a negative impact. In our opinion, the M&A that has occurred within the traditional sector will continue through 2016 as this is one of the ways in which reinsurers can reduce their operating costs and thus improve returns. Do we see the M&A trend spreading and becoming prevalent between ILS managers? We do not think so. ILS managers have less scope to improve operating costs, other than by finding lower-cost distribution channels. As ILS funds manage third party capital, rather than their own permanent capital, any attempt to merge managers carries a high degree of execution risk.
As far as the outlook for Life opportunities is concerned, we see several other areas of interest beyond Solvency II: structured settlements and deferred acquisition costs to name a couple. Our mantra has always been that direct relationship with potential middle-tier cedents is key to accessing better rewarded risks. With a few of such counterparties we expect to continue providing collateralised loan solutions in different areas of their balance sheet, if properly structured – we can’t stress enough the importance of thorough trade documentation process – the removal of direct corporate credit exposure paves the way for such a pipeline.
As we continue to look to source, originate and analyse the very best investment opportunities for our investors, we will continue to develop our technology and explore which platforms can be accretive to our offering. In addition to our own continued internal developments, there are many issues that the market should work to address. Some of these need to be addressed at both the macro and micro level. From a macro perspective, two obvious matters spring to mind. Firstly, the woefully low levels of insurance penetration within mature economies (i.e. USA homeowners Quake and Flood), and secondly, the need to develop new products to reduce the GDP impacts caused by natural catastrophes in developing economies. More inwardly concerning is the malaise with which our overall industry treats contract wordings. These are one of the most important elements of any investment yet so often, despite our best efforts, wordings are submitted post investment decision, sometimes with the initial document bearing little resemblance to the agreed terms and conditions.
Our thanks to Andrea Cavalleri and Neil Strong for their time.
Like to be featured in an interview on Artemis or have some thoughts on the market for 2016? Contact us to discuss.
Artemis’ Q4 2015 Catastrophe Bond & ILS Market Report – Outright market growth continues
We’ve now published our Q4 2015 catastrophe bond & ILS market report.
This report reviews the catastrophe bond and insurance-linked securities (ILS) market at the end of the fourth-quarter of 2015, looking at the $1.525 billion of new risk capital issued and the composition of the cat bond & ILS transactions completed during Q4 2015. The report also includes a review of the full year 2015 issuance and commentary from co-editor GC Securities.