Pendulum shifts in favour of those with stable capacity after Ian: Amundi US

Hurricane Ian has potentially created one of the most disrupted reinsurance markets of the last decade, but those best-placed with stable capacity stand to benefit most, according to an investor note by the Amundi US ILS portfolio management team seen by Artemis.

Even before hurricane Ian came along, the insurance-linked securities (ILS) and reinsurance market was anticipating harder market pricing for property catastrophe risks at the January 2023 renewals.

But now, with hurricane Ian’s impacts and losses being tallied, the industry is expecting a far more dislocated market, with potential capacity shortages.

On which, the Amundi US ILS portfolio management team explained that, “Now, Hurricane Ian has potently created one of the most disrupted markets in the past decade.”

Adding that these are market conditions that, “Some long-term and opportunistic ILS investors are now aggressively looking to take advantage of.”

Amundi US’ ILS management team believe that the market is now facing a “significant capital supply/demand imbalance” because of rising demand and now constrained capacity expected after hurricane Ian.

Demand is rising due to inflation, as re/insurers are seeking to buy more reinsurance protection.

But on the capacity side, both reinsurance and ILS companies have been unable to keep up with this demand, as ILS capital is set to be constrained for the year-end and reinsurers have in some cases seen negative impacts to their balance-sheet capital due to macroeconomic conditions.

On the ILS market side, with a nod to capital raising conditions, the Amundi US team said, “Capital inflows are currently not expected to increase enough, at year-end, in order to offset either the increased demand from insurance companies nor the potentially diminished capacity from traditional reinsurance companies.”

Because of all of this, “The pendulum has now shifted in favor of reinsurance companies and the ILS markets who have stable capacity.

“These sources of capital now have much greater pricing power and the ability to dictate more favorable terms and conditions,” Amundi US’ ILS team explained.

The Amundi US team sees a “very unique opportunity” ahead at the January 2023 reinsurance renewals, which they intend to take advantage of to the benefit of their ILS fund portfolios and investors.

We predicted this scenario, of those ILS managers with stable and importantly deployable capital being best-positioned for the next renewals, would be a factor at the renewals even before hurricane Ian hit, in this article published on September 21st.

But now, after hurricane Ian, this pendulum has shifted even further and as we’ve been explaining, those ILS managers and strategies that have structures and processes in place to mitigate the effects of, or to negate, trapped capital issues are likely to be some of the best-positioned going forwards.