The utilisation of a rated balance-sheet by an ILS fund manager can help “to smooth out” some elements for insurance-linked securities (ILS) investors, says Michael Stahel, Partner at LGT ILS Partners.
Speaking during the second day of the virtually held Artemis ILS NYC 2021 conference, Stahel discussed ILS allocation strategies both now and how they might evolve in the future.
He started by explaining how the original thesis of investing in ILS – diversification, low correlation and stable returns – still rings true today and that during the extreme period of the Covid-19 outbreak back in March / April 2020, these qualities shone through.
“When we look at the returns in 2020 across all asset classes, it’s quite astonishing how the market has recovered from the pandemic… ILS was really there to support returns; it did exactly do what everyone was hoping it would do in such a scenario. It didn’t do anything, it just provided positive, stable returns,” said Stahel.
So, just as it did during the global financial crisis in 2008, the ILS market has again shown its resilience, low correlation to wider financial market turbulence, and ability to navigate testing conditions.
While commendable, Stahel noted that 08/09 were challenging years for the sector, as were some heavy loss years that followed, including the extremely costly 2017 and now some uncertainties surrounding the ongoing pandemic.
“And, so, I think what we’re now seeing is almost like the lesson learned from that track that we have now gone on, that path that we have walked on. We have seen that there are certain challenges, certain things that we need to improve. And, we do fundamentally believe that having a rated balance sheet in between is ultimately key in order to smooth out some of the elements,” said Stahel.
In 2017, LGT ILS Partners, the re/insurance linked securities investments arm of the private bank and asset manager, upgraded its fully collateralised Bermuda-based reinsurance vehicle to a Class 3A and renamed it Lumen Re.
The vehicle received an ‘A’ rating from A.M. Best which was affirmed in 2019 while the reinsurer’s balance-sheet strength was assessed as strongest.
“It’s still interesting and to a certain degree, I’m still surprised about it, that many counterparties, especially primary insurance companies, they prefer to deal with a rated balance sheet,” he explained.
According to Stahel, the reason for this is because choosing to leverage a rated carrier releases counterparties from a lot of elements they have to maintain from a regulatory perspective.
“They would have to ensure that the collateral is in place; they have to take a conscious decision right at the end of the period, do we hold on to the collateral or do we pay it back. They can sit on the collateral which obviously leads to trapped capital, something that is definitely undesirable. And, so, the rated balance sheet helps to balance that out,” he continued.
Adding, “But, then again, we also have to be very careful because as I said at the very beginning, the reinsurance world, it’s a very efficient way to transact risk.
“So, we also have to make sure that we still keep our premise. We are still an ILS manager. Why would you buy from an LS manager? Well, first of all we can take peak exposure, we have a lot of capital. That’s what our client wants, and certainly many of the traditional reinsurance companies are somewhat hesitant to take too much of the peak. But, then again, it’s the collateralization element, it’s security that we can offer.
“We are capitalised to the one in 10,000 year event at this point. So, we would be here to pay every single loss that could occur, and we still have people working, managing claims, and no one will shut the light, and so that element is key and we certainly want to keep that.
“And, I guess the last 10 years, we tried to learn, we tried to evolve and so the next 10 years will be much more of that. It will be probably accelerated, it will go much faster. But, I do think that we’ll see fundamental changes in how risk is being transacted.”
The session, which was broadcast first to event registrants on Monday 8th Feb, can now be viewed below: