Why private credit stress matters to the ILS market: Corbett, Shuriken Capital

With building pressure and stresses in private credit investment markets in the headlines, the insurance-linked securities community should remember that a closely interlinked investor base means any fallout can have ramifications for the ILS asset class as well, Brad Corbett of Shuriken Capital Management told us.

Corbett, the investment committee lead at recently formed insurance-linked securities investment manager Shuriken Capital Management LLC, which is backed by insurer SafePoint, is well-known for his expertise across fixed income, including public and private credit.

While Shuriken Capital Management is currently focused on the catastrophe bond market for its investments, with a plan to also allocate to collateralized reinsurance as well, Corbett’s experience means the manager is acutely aware of how any escalation of pressures in the private credit space could affect ILS investor sentiment and allocations.

We spoke with Corbett to find out more and he explained how the Shuriken team is thinking about the potential ripple effects for the ILS market from private credit being under pressure.

Corbett explained, “The most immediate dynamic is whether there will be correlated redemption pressure. ILS and private credit ETFs share the same investor base, family offices, RIAs, and retail alternatives allocations. When private credit sells off and faces redemptions, managers rebalance across their entire alternatives sleeve. ILS funds can get caught in that cross-asset liquidation even though the underlying cat risk hasn’t changed at all. It’s pure portfolio mechanics, not fundamentals.

“The second channel is capital supply. A lot of the institutional money that flows into ILS, particularly collateralized reinsurance and cat bonds, comes from the same allocators who are also in private credit. If private credit is marking down and triggering redemptions or capital calls, that capital is less available for ILS primary issuance right now, during spring cat bond season. Tighter capital supply at issuance means wider spreads demanded by investors, better entry points for us, but harder for cedants.

“Third, private credit stress is forcing a broader re-examination of illiquidity premiums. ILS, especially collateralized reinsurance and ILWs with their 18 to 24 month capital trap, will face the same scrutiny. Investors who previously accepted ILS illiquidity at tight spreads may now demand more compensation, which reprices the market.”

The cat bond and ILS market has always been exposed to global institutional markets repricing their costs-of-capital higher and when significant risks emerge, be they from stresses in private markets, or geopolitical threats, it can result in moves being taken by investors which can be more challenging to manage within smaller asset classes.

But with private credit and ILS having similar investor bases and sometimes even being in the same investment bucket for large allocators, the potential for stresses in the meaningfully larger private credit space having ramifications for ILS are real.

Of course, when any stresses emerge in financial markets that is also when catastrophe bonds and ILS shine.

Corbett said, “The offsetting argument is compelling. ILS remains genuinely uncorrelated to credit fundamentals. Cat bonds don’t default because Blue Owl has liquidity issues. That zero-beta-to-credit story actually becomes more attractive in a stagflationary, credit-stressed environment. ILS is one of the few places where returns aren’t tied to economic conditions. Sophisticated allocators are starting to recognize this and may rotate toward ILS as a true diversifier.

“In the short term, watch for spread widening on new cat bond issuances as capital supply tightens. Over the medium term, the uncorrelated nature of ILS could make it a relative beneficiary as allocators seek genuine diversification away from credit. The spring issuance window will be the key test.”

The situation in private credit markets is complex and can be challenging to define. We generated an infographic using AI to provide a simple overview of some of our thinking on this topic, which you can see below.

Download the infographic here.