After another year of significant catastrophe loss activity, relative performance is set to be the important measure amongst ILS managers, and for 2022, Securis Investment Partners sees an opportunity to target retrocession, which it believes is ripe for reimagining.
We recently spoke with Vegard Nilsen and Herbie Lloyd, the CEO and CIO (Non-Life) of London-headquartered insurance and reinsurance linked asset manager Securis.
The pair began by explaining that 2021 has been another challenging year for the insurance-linked securities (ILS) market.
“In an active year like this it is about relative performance, it’s all about who has outperformed and for investors to be able to properly understand drivers of relative performance between managers,” CEO of Securis Vegard Nilsen told us.
Continuing, “The losses that you’ve posted following an event is one thing, but how does the event affect your portfolio and your ability to deploy capital going forward?
“Of course, if you have a significant amount of trapped capital it’s going to amplify the losses you’ve already incurred by diluting your forward-looking performance, but also impairing your ability to take advantage of the attractive market we see ahead.
“Fortunately, we don’t see a significant amount of trapping in our portfolios, so that puts us in a good position.”
Securis feels that this positions the company well as it moves towards the key year-end renewal season.
Chief Investment Officer (CIO) of Securis’ non-life investments Herbie Lloyd said that the challenges faced by the ILS market likely mean some changes for the landscape over the coming year.
“I envisage a bit of a shake-out in the ILS space in the next 12-24 months based on performance, we’ll also see some turnover of teams, evolving infrastructures and strategies. Quality of client service and transparency will be key throughout this period to maximise investor confidence, which has inevitably been dented.” Lloyd said.
On how Securis has managed to reduce the impact of trapped collateral, Lloyd highlighted key underwriting changes where Securis’ appetite for broader coverages and aggregate triggers have substantially reduced over the previous two years.
In addition, Lloyd noted that a pre-arranged long-term financing facility has proven helpful for Securis.
Saying that, “In terms of trapped collateral, for our mid-risk non-life only fund, we do have a financing facility in place which is not fully utilised right now and helps us to mitigate any trapped capital we might have heading into 2022.”
Lloyd also highlighted that, while others may have similar facilities in place, there is a risk that multiple loss years make such financing less useful.
“I’m not aware of widespread use of this kind of facility, but I do understand that there are some ILS managers that may already have been fully utilising similar facilities to support 2021 positions. This isn’t a tool that an ILS manager can easily use on an annual cycle with consecutive loss years, so if you’re already significantly borrowed you may not be able to top up again for the following year. So that’s going to be an interesting renewal dynamic,” he explained.
Although Securis has returned some capital to investors, they also had a successful year of fund-raising in 2021, benefiting from increased investor appetite for its more remote-risk, multi-strategy funds, Life funds and its cat bond only products.
Securis CEO Nilsen highlighted that while the investable ILS market is back to the same size as it was a few years ago, the mix has changed, with catastrophe bonds a growth area and collateralised reinsurance shrinking somewhat.
“We’re seeing the same trend here. We have seen some investors leaving the space, but we have also raised over $600 million of new money this year, and most of it has come into lower risk, lower return products in addition to our Life funds which have performed very well this year,” Nilsen said. “Investors are just more risk averse than before.”
Market conditions suggest there’s perhaps more of an opportunity emerging in reinsurance and retrocession than cat bonds, where pricing has stabilised and perhaps even softened over the course of 2021, in response to investor appetite and capital inflows to that segment.
Nilsen now sees a good opportunity for investors to enter the space considering the attractiveness of the market.
He explained that, “We believe the outlook will continue to show premium rate rises on the back of the events this year.
“In today’s low interest rate environment investors are also increasingly seeking fixed income alternatives and diversifying strategies, which I think will continue to be an important opportunity for ILS managers.
“The true diversification benefits of ILS are most apparent during times of stress in the traditional capital markets, as we saw in 2008 and the European debt crisis in 2012. We are probably overdue one. Having said that, ILS managers must ultimately generate absolute returns for investors otherwise they will focus on other competing investment opportunities.”
One opportunity that Securis hopes to capitalise on is in the retrocession market, which the ILS manager sees as the most capital constrained and having the greatest potential for rate rises.
CIO (Non-Life) Lloyd explained that the retrocessional market is an area that can be viewed as particularly challenging right now, but it also presents a distinct opportunity in Securis’ view.
“We have offered lower risk, named peril occurrence retro since the early days of Securis. It’s complementary to cat bonds, it is attractively priced at the moment and has performed extremely well compared to riskier aggregate transactions. We are targeting additional remote risk retro at 1.1 as part of an overall offering to cedants which will include other risk transfer solutions like quota-share, ILWs and cat bonds.”
“We’re also looking at other ways to broaden the retro opportunity-set, because a big chunk of the retro market is still written on a 1 @100% reinstatable basis, probably 50% of retro remains unavailable to ILS managers, unless they can overcome that double-collateralisation issue,” Lloyd explained.
Adding, “We think there are ways that we can tackle this and we’re looking at it closely for 2022. So instantly that can double our opportunity-set if we can overcome that efficiently, we can then continue to focus on partnering with preferred cedants at targeted attachment points.”
Lloyd said that there’s been a pick-up in rated carriers showing interest in writing retrocession, but here he feels that growing attention on catastrophe and in-particular climate risks from rating agencies may have a bearing on who chooses to write retro going forwards.
Rating agency scrutiny of climate risks in relation to catastrophe capital charges, “Has the potential to have far reaching implications for the entire risk transfer chain, all the way from insurance, through reinsurance and on to retro,” Lloyd explained.
While interest in retro from balance-sheet carriers has increased as prices have risen over the last few years, Lloyd feels scrutiny from rating agencies could reverse that trend.
“I suspect that will be the first thing to go if the rating agencies start to crank up capital requirements to support those ratings. I think one of the first classes of business that will disappear from a traditional rated balance-sheet strategy would be retro,” he said.
Which is another dynamic that has driven Securis’ interest, its view of retrocession and a reimagined approach to it as a future opportunity for its fund strategies to benefit from.
According to Lloyd, “One of the things we’re starting to put some thought into right now, in the context of the reinstatable product, is whether the credit risk associated with that second reinstated limit is misunderstood by buyers of retro?
“We think it is. We think that’s something that’s brushed under the carpet by the market.
“There’s an operational path of least resistance for brokers and buyers, in terms of buying retro from a rated carrier and clearly 1@100% business is very efficient as a purchase.
“But is a rated reinstatable retro solution as credit secure as it may seem at a glance? We don’t think so, so we believe that the security of cash collateral, especially if it is offered with a fully collateralised reinstatement, should prove an attractive choice for cedants now and in the future.”