Sentiment among third-party investors for ILS is much improved as of August 2024 from two years ago, but the cat bond segment is still the outsized beneficiary of this brighter outlook.
The reinsurance market turn of Q4 2022 was welcomed by ILS investors, many of whom took significant nat-cat losses and hits from Covid-19 from 2017 to 2022.
As market conditions have improved, cat bond funds in particular have drawn inflows, with the 2023 return of 19.7% for the Swiss Re Global Cat Bond index drawing positive press. End investors view bonds as sufficiently well modelled and priced, and remote from small and mid-size nat-cat events.
The positive sentiment around cat bonds has driven segment volume to an all-time high of around $46bn by 30 June, up by around 12% over the course of Q2, according to Aon Securities.
Further, cat bond pricing remains at historically elevated levels as high demand has matched rising supply. Multiples on expected losses averaged 4.7x in Q2, higher than pre-Hurricane Ian averages, though down from a high of 7.8x in Q3 2023, according to analysis from Insurance Insider ILS.
Bonds’ popularity has been widening the pool of ILS investors too, although several opportunistic allocators dipped into cat bonds in 2023 and then took their winnings off the table in 2024.
Meanwhile, multi-asset investment houses that have dipped into the space have stayed positive on cat bonds.
The upbeat outlook for cat bonds as an investment class is borne out by the string of post-Ian cat bond fund launches from established ILS players not previously active in this space, such as Aeolus and Hiscox Re & ILS.
Meanwhile, existing cat bond funds have swelled with new capital and retained earnings.
The combined AuM at UCITS cat bond strategies hit $11.6bn as of 16 August, up around 13% from $10.3bn as of 18 August 2023, according to data tracked by Plenum Investments.
Collateralised re
Providers of private ILS or collateralised reinsurance deals have had a harder time staying positive on the asset class in the aftermath of the high-loss years.
The segment has been dogged by capital trapping that has depleted average annual returns and prevented allocated capital from being redeployed in the higher rate environment.
Investor sentiment toward the private collateralised market is expected to require more than the single good year of performance that 2023 provided, and possibly more than two good years, before confidence and positivity return meaningfully.
Fresh allocations have proven slow overall during H1 and ILS houses generally are talking down their expectations for the remainder of the year.
However, there are signs of rising interest as improvements continue to be made to terms and conditions that will reduce the potential scope of capital trapping, and as pricing and retentions continue to hold up.
Reinsurer-backed ILS platforms have gained some traction through their ability to offer portfolios of risk more specifically tailored to individual investors’ investment goals.
Everest became the latest reinsurer to formalise structures within its asset management arm, with the formation of Bermuda insurance manager Mt Logan Capital Management during H1.
The move could help it to draw a wider range of investors in the future by way of consultancy recommendations.
Sidecars
Positive sentiment towards sidecars from third-party investors has helped grow the segment to around $10bn at the mid-year point, Aon said in its annual ILS report.
This equates to a 40% increase from $7.1bn at 30 June 2023.
Renewed investor interest has been aided by high reinsurance rates and sidecar returns of around 30% in 2023.
Some of this renewed interest can be attributed to demand for sidecar vehicles focusing on longer-tail lines of business, namely casualty.
Following RenaissanceRe’s Fontana Re launch in 2022, Aspen announced a bilateral casualty deal in April with Pimco, after Axis set up Monarch Point Re with investment from Stone Point in September 2023.
Additional sidecar vehicles are in the works and expected to form during H2.
The end investor base for casualty and property sidecars is said rarely to overlap, given the differing investment objectives that the risks offer, which implies that a new investor base may be entering ILS and driving growth.
ILWs
The ILW market is the smallest ILS market by volume according to Aon, at around $5bn as of at the end of H1 2024.
ILS funds returned to purchasing ILW covers this year as rates softened. The retro coverage was a particularly attractive hedge in the face of early forecasts of an over-active Atlantic hurricane season in 2024.
In April, pricing on US peak perils was down by around 20% in Q1 2024 versus the prior-year quarter.
ILW buying peaked in March, April and May, with Nephila among the largest purchasers, securing around $600mn of ILW limit.
Buying slowed down once forecasts began to solidify and portfolios were finalised.
There was keen focus on county- and state-weighted products, with triggers in the range of $30bn-$50bn for Florida and $60bn-$70bn nationwide.
Aside from natural catastrophe, there was also appetite for ILW coverage for cyber, as Swiss Re placed a $50mn cyber retro ILW in January.
The deal was the first of its kind and signifies to reinsurers that cyber capacity via ILWs can provide a viable retro option versus traditional reinsurance.