With property casualty reinsurance rates and inflation rising in recent months, ratings agency AM Best sees this as a potential headwind for the growing cat insurance-linked securities (ILS) segment, as investors may turn their attention to casualty risks.
Outside of the usual property damage and extreme weather risks, investor interest in insuring and securing returns from alternative business lines has increased in recent years.
As ILS investments focused on reinsurance of losses return over five years or more, investors are open to looking at other lines of business where insurance or reinsurance returns can be generated.
Of course, the ILS market has been looking for business expansion for a long time. It has been a topic of discussion at every ILS conference for over a decade, but progress has been slow.
Things have only started to accelerate in the last few years, with growing investor interest in the challenging bankruptcy environment in the property cat.
However, with property-casualty reinsurance rates-on-line returning to record highs and terms and conditions tighter than they have been in more than a decade, AM Best believes investor focus may return to cat risks, which will hurt cat growth. Non-Cat ILS.
“There may be headwinds for non-cat ILS expansion in the near future,” AM Best said in a recent report.
Adding, “The recent improvement in asset prices and terms may prompt investors seeking the benefits of ILS to deploy capital into the popular asset cat market rather than non-cat ILS.”
Some ILS market managers say that the cat market has never been as attractive as it is to attract such investors.
Of course, this is absolutely true of those ILS managers. Depreciation investments are probably at their best value and underwriting.
As we reported last week, risk bond spreads hit a record high based on our pre-market data set.
Combine that with improved terms, higher attachments and other feature enhancements, and it’s clear cat bonds are as attractive an investment as ever.
However, we do not believe that the improved return potential of Artemis will dampen the wave of demand for non-cat ILS investments.
Indeed, while investors are more likely to reallocate more capital back to risk, the more accessible it is to diversify in the insurance and reinsurance space, it will only lead to more capital being diverted to non-cat ILS strategies. .
Non-cat ILS is showing a level of interest that should continue to grow as an ILS investment segment.
In addition, non-cat ILS are attractive to investors who have not previously considered natural disaster, because they are attracted for various reasons, the return profile and in some cases the asset side of the insurance balance may be more attractive than certain non-cat ILS strategies.
AM Best Points Ledger Investing and Multi-Strat are both operating in the space, to which you should add Vesttoo, ILS manager Hudson Structured, which has had a non-cat focus for years now, likes traditional re/insurance market players. Aspen and AXIS are finding ways to share concerns with investors, as well as RenaissanceRe with Fontana’s casualty/special third-party support.
Additionally, we put cyber risk into the non-cat ILS segment, which is the market place it seems.
The key to developing a non-cat ILS position is always about traction.
You will never develop a sustainable market until reasonable deals are made and various investor access points are found.
But now, just as it did during the property bust of the late 1990s and early 2000s, there are more ways for investors to find risk-free ILS investments, more deals are happening, and the landscape is starting to take shape.
Non-cat ILS is a nascent, new market segment, but it’s gaining acceptance that it’s here to stay, with those players already moving forward, like those mentioned above, now positioned to lead the growth of this unique segment of the ILS marketplace. .
AM Best also said in its latest report that the secondary market will be key to the growth of the non-cat ILS segment.
Which will work, but uncertainty remains as to how liquid a longer-term non-cat ILS will be.
While cat bonds are marketable, the largest portion of property casualty reinsurance assets has grown without a secondary market, and non-cat ILS appear more likely to end up in largely privately-guaranteed deals than fully securitized notes that are highly transferable.
So, while a liquid secondary market certainly helps to expand the reach of the non-cat ILS market, unless that is a secondary market with genuine interest from both sides and those creating and structuring price offers, it is not. It can be especially liquid for the time being.
In the future, we hope that true secondary liquidity (trading) will become a more widespread feature of the entire ILS market, private equity deals and non-cat ILS, benefiting the entire ecosystem.
I have been dealing with investors interested in leveraging insurance and insurance market returns through ILS securities for over two decades now. The topic of whether the expanded insurance risks will be presented to investors has been around for all those years.
Non-cat ILS is always developing methods, strategies, structures and business models, as well as technology, to make this possible, it is something more than sitting rates in other markets.
We’re now at the stage of ILS growth where investors are really getting involved and growing, so it looks like they’re both here to stay and likely to expand, regardless of asset prices.
A good example of this evolution of the non-cat ILS space is covered by a recent transaction from Vestu, which marks the transition to a new level of maturity as the non-cat ILS technology firm strives to prepare its first investment stage. Non-cat damage bond.
Such moves suggest that non-cat ILS as part of the overall ILS and investors looking for diversification in ILS will continue to grow, which is good for everyone involved in the asset class.
