Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

Some ILS funds set for third & fourth consecutive negative month

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Some insurance-linked securities (ILS) funds have reported their third and in some cases have, or are set to report a fourth negative month of returns in a row, as greater clarity over the magnitude of losses from the European flooding and hurricane Ida continues to emerge.

positive-negative-rating-downgradeAccording to our ILS market sources, some funds have reported negative returns for July, August, September and October already, with a chance of November also being negative for a handful, we understand, as ceding companies provide updates to their loss estimates for these catastrophe events and so certain ILS backed reinsurance positions have their valuations adjusted.

It is entirely possible there could be ILS fund strategies that experience five consecutive months of severely dented returns on the back of these loss events, we understand. Although, we’re not certain if any will actually be negative for the full five, from July through end of November 2021.

The impacts of the flooding and hurricane Ida have effectively destroyed the peak peril return stream for some ILS funds, it seems, with the majority of their annual premium return stream normally booked through these five months of the year.

The majority of ILS funds that invest in collateralized reinsurance and retrocession will have had some impact through most of these months, with the magnitude of impacts and how negative returns have fallen depending on where in the risk tower they allocate their capital and also how much aggregate exposure they were holding this year.

Conversely, there are some ILS funds that write predominantly collateralized reinsurance and have fared much better, given their focus on occurrence and lower layers of reinsurance towers, as well as some ILS fund managers preference to avoid too much exposure to peak hurricane zones such as Louisiana.

Timing was everything with both the European flooding and hurricane Ida.

A major European catastrophe event that hit almost every exposed reinsurance layer is a relative rarity and its timing around mid-July meant it occurred just as the return stream from US wind risk was picking up.

The industry loss estimates for the flooding then rose steadily over a number of weeks, causing reserves to be hardened in some cases and side pockets to be added to by some ILS funds, we understand.

This had the effect of dragging out the impacts to the insurance-linked securities (ILS) market a little, meaning August returns were already suffering even before hurricane Ida hit.

Then hurricane Ida barrels into Louisiana right at the end of August.

Not only was timing also an issue with Ida, given it was particularly challenging to book potential losses from the hurricane right at the end of August, but the fact the storm continued to deliver insured losses for a number of days as it travelled north and east also exacerbated the situation, we’re being told.

Hurricane Ida’s initial impacts in Louisiana were bad enough and for most companies their initial loss picks were based on that southern and Gulf region.

But with damage extending far into the northeastern US states, it was always clear hurricane Ida would prove to be a particularly challenging loss event to estimate for and reserve against.

Loss estimates for hurricane Ida then came with a particularly wide range, as some struggled to see the storm driving a $20 billion industry loss, but others were opting for around $40 billion.

There’s still quite a range in the estimates for hurricane Ida, even at this stage and there’s an expectation in the market that reporting agencies such as PCS could continue to add to their tallies over the coming months.

The range of ILS fund performance is wide across this period as well, with some down more than double-digits, but others only slightly down and still more slightly up.

Almost every ILS fund in the market has felt some impact from these two events, or from their aggregation alongside catastrophe events from earlier in the year.

But that is the beauty of a diverse ILS fund marketplace, with a wide range of risk and return strategies, spanning catastrophe bonds right the way through to higher-risk aggregate reinsurance and retrocession.

These losses are not unexpected events, falling well within the range of possible losses both for a European flood or for a US hurricane.

But this time, their timing and the fact they came relatively close together and also had some complexities attached, have challenged the ILS market perhaps a little more than might have been expected, by some.

The final complication is the fact that we are now fast approaching the key January 2022 reinsurance renewals, with two major catastrophe loss events that are still quite fresh in the memory and still developing.

This is leading to interesting renewal dynamics, as some ceding companies haven’t updated their loss estimates for the events for a little while, we understand.

Which is leading to some nerves over what could be added after the renewal has been signed and is one factor pushing certain renewal discussions later, as markets look for greater clarity before confirming their appetites and pricing to renew for some clients at all.

There’s never a good time for a major catastrophe event, for those affected directly by it, or for the insurance, reinsurance and ILS market.

But 2021 has raised a surprising number of challenges and as a result the impacts to ILS markets and more broadly reinsurers and retrocessionaires, are not at all unexpected.

A similar situation emerged following the major hurricane landfalls of 2017, when some ILS funds incrementally added to their loss picks over a number of months after the events.

Transparency, or lack of it, can be a partial driver of this, as clarity over losses takes a considerable time to emerge. Loss creep is another driver, of course and this year hurricane Ida may prove a little challenging over the coming months, with some sources suggesting it could experience some creep related factors, as inflationary economics impacts the local recovery from the event in Louisiana.

Register today for ILS NYC 2023, our next insurance-linked securities (ILS) market conference. Held in New York City, February 10th, 2023.

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