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ILS market likely to rally as capacity needs grow

market storm

MONTE CARLO, Monaco — The insurance-linked securities market cooled in some areas in the second quarter, as economic turmoil and higher interest rates pushed investors into other investment vehicles, but market participants expect it to rebound.

Higher demand for reinsurance capital and the attraction of insurance risk as an investment uncorrelated to other capital markets investments should bolster the ILS market, they said during meetings at the Rendez-Vous de Septembre reinsurance meeting in Monte Carlo last month.

Catastrophe bond issuance fell 8.9% in the second quarter, compared with the same period last year, according to a recent report by Swiss Re Ltd. But estimated overall alternative market capital increased about 1% year-over-year, according to Guy Carpenter & Co. LLC.

Turmoil in the broader capital markets this year affected capital raising in the ILS market, but the market appears to have stabilized, said David Priebe, New York-based chairman of Guy Carpenter.

Interest in ILS is returning as reinsurance and retrocessional reinsurance capacity demand increases, he said.

“I think you’re going to see a continued increased ILS issuance and appetite,” Mr. Priebe said.

Higher interest rates increase the yield on ILS funds held in trust but also create other attractive credit investments for investors, he said. Insurance investments, though, still offer a diversified asset class to investors.

Political and economic turmoil and rising interest rates have resulted in investors reducing alternative investments, said Bill Cooper, head of capital advisory at TigerRisk Partners LLC.

With less money going into the market, investors will likely look for insurance vehicles and managers that have a strong track record in the alternative capital market, he said.

Catastrophe losses over the past several years have resulted in “investor fatigue,” said Michael Millette, founder of New York-based Hudson Structured Capital Management Ltd. during a panel discussion sponsored by Munich Re Ltd. at the Rendez-Vous. 

While reinsurance rates are rising, which will benefit ILS investors, they still need to increase 20% to 30% to reflect increased exposures, he said.

ILS capital managers are “more bullish” about the market and cedents were reassured about the ILS market’s sustainability when investors continued to invest capital after large catastrophe losses in 2017, said Paul Schultz, CEO of Aon Securities, a unit of Aon PLC, during the panel discussion.

“As we get to the different products within the ILS space, we’re seeing a better match today of the type of investors and investment horizon they have for that particular risk profile, so that in itself leads to sustainability and growth,” he said.

Lockton Re, a unit of Lockton Cos. LLC, launched a capital markets division during the Rendez-Vous.

“It’s particularly timely given the constraints we expect to see in the cat market,” said Tim Gardner, New York-based global CEO of Lockton Re.

The division will not have a profit and loss statement to fulfill, Mr. Gardner said.

“What we really want is for them to be able to work with clients in conjunction with the broker teams to say, ‘Is it a treaty solution? Is it a bond solution? Is it a hybrid?’ and really explore the full gamut of the optionality and then put forward a very agnostic view,” he said.








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