After several years of rate and term improvements, notably in the property catastrophe arena, there are signs the market is levelling off. But generally, returns in the insurance-linked securities (ILS) market remain attractive, according to industry experts.
After years of soft market conditions, elevated catastrophe claims, dangerously low interest rates and more recently the Covid-19 pandemic, the reinsurance market remains more favourable for sellers.
But while these compounding factors promised significant rate increases at the January 1st, 2021 renewals, notably for loss-hit business, a substantial inflow of capital designed to take advantage of the hardening market meant that for the most part, pricing came in below expectations.
In fact, throughout 2021, the reinsurance renewal periods have been described as disciplined, yet from a rate perspective, somewhat disappointing.
For ILS, managers and investors have had to navigate a few years with some difficult losses, and while this year started with severe US winter weather, reinsurance rates are rising and so there’s potential for returns in ILS portfolios to increase as well.
The performance of ILS was a key theme during a panel discussion as part of our virtual ILS Asia 2021 event, held recently in association with our headline sponsor AM RE Syndicate Inc.
According to panellist Donna Davis, an Associate at Frontier Advisers, who track the performance potential of a group of ILS funds, it’s been an interesting couple of years to monitor ILS performance.
“What we do here at Frontier is we actually uncategorised the sub-sectors by expected loss, and then monitor their forward looking characteristics. And it gives us a really interesting perspective on the market.
“So, I think what everyone has seen, no-loss yields weren’t at the levels people were expecting. I think there was a lot of capital that came in ahead of renewals, so top level pricing wasn’t at levels we had expected. But what was really interesting, was a lot of renegotiation of terms and conditions really seemed to filter through to reductions in expected loss and tails. And, so, we’re finding risk-adjusted returns are actually looking a lot better,” said Davis.
Lorenzo Volpi, Partner, Leadenhall Capital Partners LLP, agreed with Davis that with regard to non-life, the overall market remains attractive.
Interestingly, Volpi went on to note that unlike post-2017 events where investors reloaded quickly ahead of 1/1 2018, that’s not happened today despite current market conditions being better now than they were after the significant events in 2017.
Reasons for this include the inability to meet new potential investors face-to-face owing to the pandemic; the fact Covid-19 likely distracted investors and turned their focus to other asset classes; competition with other asset classes; and also the loss experience of recent years and potentially portfolio recalibration, explained Volpi.
“Overall, the most important point I think for investors to appreciate is that these latest increases on a risk adjusted basis, are obviously compounded on previous years. This has been a trend that started in 2017. So, historically, we are still in a very attractive situation.
“Obviously, the question now is whether we have reached the peak or not, but we’ll see that through the renewals in January,” said Volpi.
Expanding on this, panellist Martin Burke, Chief Financial Officer (CFO) at Everest Re’s Mt. Logan Re Ltd., agreed that risk-adjusted returns are on the rise and explained that from where Mt. Logan sits, conditions are favourable.
“Currently, we’re seeing attractive opportunities in property excess of loss and fac, property cat, casualty, especially on the facultative side, aviation, and mortgage. And the majority of the Mt. Logan AuM really supports the property cat,” said Burke.
“I’d echo Lorenzo and Donna’s comments; we’ve had four years of both rate and term improvements in the property cap space. And I think what we’re seeing now is risk adjusted returns are up, and we’re seeing with recent performance more capital coming into the cat bond space. So, we are seeing pressure when you look at the prices on cat bonds, which are probably coming off a little bit at the moment. And we’re seeing most of the continued rate increase is on the private side, and especially more lower down in the working layers.”
Adding, “In terms of how long we think it will last, it does feel like it’s levelling off a little bit at these recent renewals on the property cat side. But the impact of Covid hasn’t gone away, the impacts of climate change is still with us. I think the reinsurance market, I feel like they’re holding their lines.
“I think it’s more a case of maybe it’s beginning to level off, but we don’t really see it reducing in the near term.”
As well as the on-demand playback, we will be archiving every session from our online and virtual ILS Asia 2021 conference over on our YouTube Channel in the coming weeks and audio versions will also be uploaded to our podcast which you can subscribe to here.
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