We expect a truly exciting ILS opportunity-set for 2023: LGT’s Michael Stahel

The insurance-linked securities (ILS) market looks particularly attractive for 2023 on the back of rising premiums and tighter control over terms and structures, leading Michael Stahel of LGT ILS Partners to call the opportunity-set “truly exciting”.

Speaking recently at the LGT ILS Partners manager update webinar, Stahel, a Partner and Portfolio Manager at the investment manager, explained that “the entry point right now into the ILS space is very attractive,” with opportunities to secure strong returns both on the private or collateralised reinsurance side, as well as the more liquid catastrophe bond space.

Stahel explained that the LGT ILS Partners funds and portfolios have weathered the impacts of recent hurricane Ian well, with a range of outcomes from roughly flat to down 400 basis points, depending on the risk profile of a fund strategy.

The reason for this comparably low impact vis-à-vis for instance the Swiss Re Cat Bond Index is in the active risk selection approach, which has seen the LGT ILS Partners team striving to increase diversification and to lower their weighting to peak zones like Florida.

Another component that benefits the ILS manager, is the structural effect of utilising its reinsurer Lumen Re for its collateralised reinsurance writing, which helps LGT ILS Partners when it comes to managing the impacts of losses and being able to move capacity forwards with limited effects from trapping of collateral.

Discussing how the ILS and reinsurance market has responded to recent hurricane Ian, Stahel explained that premiums are expected to rise by 20% to 40%, saying that this is not even for loss impacted positions which could re-rate even higher.

“Clearly it is a hard market environment. We’re seeing a significant increase in premium levels, which is also coupled with the fact we’re now able to more or less define the terms.

“We’re also able to clean up structures, clean up terms and conditions. So it’s not just pricing that’s more attractive, it’s also the opportunity-set and where we want and can deploy money,” Stahel explained.

On top of the higher reinsurance pricing and how that will raise returns for ILS and catastrophe bond products, Stahel also highlighted the effect of the economic environment on returns.

“Inflation is a very important component of the current opportunity-set. Inflation is leading to an increase in insured values and therefore to an increase in demand for protection,” Stahel said.

Adding that, “It also helps the asset class that inflation and the current rising interest rate environment, at least in US dollars, is leading to higher collateral returns.”

Looking ahead to 2023, Stahel said that LGT ILS Partners sees, “a truly exciting opportunity-set,” adding that “the outlook is very attractive.”

Going into how LGT ILS Partners will seek to approach this market opportunity, Stahel said it’s about more than just price.

“We’ll be using the outlook and the attractive market momentum not just to boost returns, but very much to optimise returns.

“Meaning, to derisk the portfolio, restructure the portfolio, to make sure our funds can deliver a robust return in the year 2023, taking into account that there will be some event activity,” he said.

Stahel closed by saying that, “What we need to do on the portfolio management side, is take into account that in any given year a storm or hurricane may occur, so our goal is to be able to absorb such an event and still generate positive returns.”

LGT ILS Partners believes that this attractive opportunity will last well into 2023, meaning investors stand to be able to access very attractive investment opportunities in robust and performant ILS portfolios, while still benefiting from the ILS asset classes low correlation to broader financial markets.