Significantly improved outlook for alternative capital & ILS: Rüede, Swiss Re

Philipp Rüede, Head of Swiss Re’s Alternative Capital Partners (ACP) unit told us in an interview that the outlook for use of alternative capital and for insurance-linked securities (ILS) as an asset class has “significantly improved”, with expected returns now doubled or tripled in some ILS strategies.

Speaking with Artemis around this year’s Monte Carlo Reinsurance Rendez-vous event, Swiss Re Alternative Capital Partners Head Rüede noted that the improved ILS market performance is driving much stronger investor interest.

Rüede also explained that his Alternative Capital Partners (ACP) unit has been growing in importance for Swiss Re as well and that continued growth of assets under management is now key to maximising the contribution this business makes to the global reinsurance giant.

Speaking about market conditions and investor sentiment, Rüede told us that, “Compared to 2022, we see a significantly improved outlook for the AC/ILS asset class, with expected returns to investors doubling or tripling in some strategies.

“This has led to much stronger interest from institutional investors around the world looking at the opportunities available.”

However, there is still work to do in order to encourage longer-standing investors that they should increase their allocations to ILS again, even with the much improved rates.

Rüede explained that track records are becoming increasingly important as a result.

“For some investors, following years of below-expected performance of the asset class, there are still concerns about the sustainability of increased returns,” Rüede said. “Being able to demonstrate historical performance in-line with expectations has therefore been key for those winning investor mandates.”

For Swiss Re, the growth of its Alternative Capital Partners (ACP) business and the rising ILS asset-base it manages, benefits the reinsurer in multiple ways.

“ACP enables the Swiss Re Business Units to grow their portfolios while proactively managing risk limits and capital associated with the Group’s peak risks. Additionally, ACP derives fee income from commissions, investment management fees and structuring/placement fees. Steadily increasing assets under management is key to the continued growth of this important contribution to Swiss Re’s results,” Rüede told us.

Rüede went on to explain that, “Overall, ACP’s mission is to reduce the cost of equity of the Group. This can be achieved through transactions which directly reduce our cost of equity (e.g., Group Stop-Loss cover) or through fee and commission revenues.

“In H1 2023 ACP’s activities generated USD 74m in fee and commission revenues (for H1 2022 the fee and commission revenues amounted to USD 43m).”

As we reported back in August, higher assets under management and improved returns in the insurance-linked securities (ILS) funds and sidecar structures managed by Swiss Re’s Alternative Capital Partners (ACP) division drove a significant increase in fee income and commissions earned by the reinsurer in the first-half of 2023.

Looking towards prospects for the rest of the year for the Swiss Re ACP unit and its insurance-linked strategies, Rüede believes that performance will matter and that some investors may look to increase their commitments, if performance lives up to expectations.

“Much will depend on the performance of the AC/ILS asset class through to the end of the year. In the event that returns meet or exceed expectations, confidence will grow and there will be demand from those already invested to increase their allocations,” Rüede explained.

But cautioned that, “Rather than a rush of capital, we expect a steady increase in allocation if expected return outlook remains attractive.”

Read all of our interviews with ILS market and reinsurance sector professionals here.