Investor interest in ILS resurging, but allocators will manage capacity: ILS NYC 2024

Investor interest in the insurance-linked securities (ILS) asset class is resurging, as 2023’s strong returns and improvements to structures peak interest across institutional markets, but allocators warn they are prepared to downsize commitments to protect the market when necessary, attendees at our ILS NYC 2024 conference heard in New York on February 9th.

As we reported earlier this week, a message that came through loud and clear from the conversations on stage at the conference, was that ILS and third-party reinsurance capital managers are determined to sustain the new reality of improved terms and higher attachment points, while end-investors say they need to see more than just one year’s evidence of the better environment.

During the same session, the first of the day heard by our ILS NYC 2024 conference attendees, panellists also explained that investor interest is rebuilding and as a result some caution may be needed to ensure capital flows are matched with available investment opportunities, if the reinsurance cycle is to be better managed than had been seen at certain previous occasions.

Lorenzo Volpi, Deputy CEO and Managing Partner at Leadenhall Capital Partners LLP, was moderating this panel discussions and explained the backdrop to 2024.

“It’s clear that most of the ILS managers have learned some lessons and one of the biggest tasks for us has been how we demonstrate to investors that we’ve learned from the past,” Volpi explained.

Going on to say that after another year with around $100 billion of insured catastrophe losses in 2023, “We also recognise, that most of these losses have been retained by the insurers, which means that their profitability has been under pressure, but also their need for reinsurance continues to increase.

“The good news is that the higher demand for reinsurance has been met with a record level of alternative capital.”

Michael Stahel, Partner and Portfolio Manager at LGT ILS Partners Ltd., noted that performance is driving investor interest after the last year.

“2023 was a great year, as we all know. But we also understand there have been special effects on that year, including some recoveries and some spread tightening in the aftermath of Hurricane Ian. Also, the much higher collateral return helps, of course,” Stahel explained.

Going on to say, “How do we see investor interest? It’s coming back, and I unfortunately almost fear, that it’s coming back hard.”

Stahel then highlighted the importance that ILS managers work to manage the cycle, in terms of matching their capital as it is expected to grow, with opportunities to deploy it in reinsurance and catastrophe bonds.

“We’re in close discussions with the teams from the securities groups, to manage flows. Because if I look back the last 15 years I’ve been doing ILS, I guess the key challenge for the market and for ILS managers, is managing interests. Managing investor interest and managing deal flow, to get to an optimal level.

“So, 2023 has been great. But of course, it has been great because there was a lack of capital and I guess, time will tell now, for the next months to come, whether investor interest will return and whether deal flow will match it.”

Also participating in this panel session, Jason Bolding, Global Head of Sales & Distribution at Gallagher Securities, the capital markets arm of reinsurance broker Gallagher Re, gave his opinion on investor sentiment and how it is developing after a record year of ILS market returns.

“From the perspective of the ILS funds we talk to, 2023 was obviously a stellar year. As you look at forward inflows, it does seem like there’s, generally as we talk to ILS investors, there’s money coming in,” Bolding said.

Clarifying, “However, I don’t think it’s at the same velocity that it has been in the past.”

“Generally, it’s still harder to raise capital for collateralized re mandates, than it is for the more liquid cat bond funds. But we are seeing some have success in that arena as well,” Bolding continued.

“I think generally, from the end investors, there’s still the typical concerns of climate change and modelling risks. But to some extent, those are alleviated a little bit with just how far rates have gone up over the last several years.

“So I think generally, among the ILS funds, sentiment’s pretty positive at the moment,” Bolding added.

While investor interest in ILS is rising, the experience of past years where capital flowed in rapidly has made some more cautious and prepared to act, should they feel the market is over-capitalised.

Eveline Takken-Somers, Senior Director, Lead Portfolio Manager – Insurance Portfolio at PGGM, commented, “I think we just need to, as end investors take full responsibility and also reduce capital, if we don’t believe that the market is adequate. I think that will likely happen. Because we also learned from the past.”

Takken-Somers went on to say, “Even though you do compare it to other asset classes, it still has a big opportunity of a huge draw down and capital will be gone and I think that’s also something to take into consideration.”

For PGGM, the ability to be tactical is also important, in terms of building up capital when the opportunity is there, or then pulling-back when it’s not.

“We have a strategic allocation,” she explained, going on to say that the ideal is to have more bandwidth to adjust around that target allocation amount, “So we can be larger in times when rates are up and smaller in times when rates are down.”

“I firmly believe that there was way too much capital prior to 2017 in the system, and clearly we were part of that. So, if we can manage that going forward in a better and more efficient way, we’ll do so,” Takken-Somers said.

Bernard Van der Stichele, Senior Portfolio Manager, ILS at HOOPP (the Healthcare of Ontario Pension Plan) agreed with this approach and said, “The way I look at it, we have a particular maximum allocation to ILS. I’d like to stay below that, such that when I see really good opportunities I don’t have to go through a lot of approvals to act quickly.

“With an allocation to cat bonds and an allocation to the other stuff, I think it makes it fairly easy to manage that, that capacity and take some money off the table when when necessary.”

So, while investor interest in cat bonds and ILS is certainly resurging right now, the more experienced investors in the space are not averse to pulling-back their allocations, should they feel the market may be adversely affected by too much capital.

While it is also clear that ILS managers remain keen to manage the amount of capital in the reinsurance system much more closely than before.

It will be interesting to see how that plays out through 2024.

We’ll bring you more coverage from the event and video / audio of every session will be available in the coming weeks.

Artemis’ next conferences will be ILS Asia 2024 in Singapore this July and Artemis London 2024 in September!

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