Heading into fundraising season, ILS managers are keeping a watching brief on multiple factors they think will influence inflows, with the draw of cat bond strategies expected to stay strong, as the days count down on hurricane season.
Issues on the watchlist include climate change narratives, equity market volatility, reinsurance market conditions and hurricane season uncertainty, as well as treasury rates and individual investors’ investment objectives.
Sources said generally that fundraising conditions are warmer now than they have been at any time in the past few years, after strong returns in 2023 and positive performance so far this year. However, managers mostly caution that the outlook for major inflows remains challenging.
One ILS market observer noted: “We don’t expect any big-ticket inflows, and expect rates at 1 January to remain stable, risk-adjusted.”
Conversations with investors are active, but “things are not moving as fast as you’d like”, an ILS manager added.
There is some positivity around potential inflows to cat bond funds, with more muted interest in mixed cat bond and collateralised re strategies. The perceived cleanness of the cat bond product is continuing to win out with investors.
One manager indicated that pension funds, family offices and endowments, and private wealth managers from across Australia, Europe and the US were “poised to deploy” into cat bond strategies. “A bit less [so] in Japan,” they added.
Another said opportunistic hedge fund capital had indicated a readiness to deploy if a 2024 hurricane loss caused rates to harden.
The other big influence on spreads will be volume of new issuance through 2024 and into the new year. Issuance volume was expected to be “a big topic” for discussion at the Reinsurance Rendez-Vous in Monte Carlo this week, a source said.
They said questions include: “How big is the supply? How well will the supply match with demand?”
Around $2.5bn of cat bond limit is maturing in the second half of 2024. This includes $475mn of Acorn Re coverage, a maturing three-year deal that was placed in 2021, and Google parent Alphabet’s $276mn Phoenician Re bond, also a maturing three-year quake cover.
Reinsurer offerings are competing with ILS managers
The fundraising temperature for private ILS/ collateralised re strategies is cooler. In this segment, a source notes that investors generally fall into two groups – those who invested in 2015, 2016 and 2017, and the post-2017 cohort.
“People who invested in 2015-17 are difficult to bring back, they had a bad experience, trapped collateral. After 2017, a good performance, these [investors] tend to top up,” they said.
“Private is still not really growing. There is still a lot to be paid back and in run-off,” the source added.
Multiple ILS market sources also remarked on the number of reinsurers exploring ILS offerings. “The main competitor to ILS managers is reinsurer sidecars and quota shares,” said a source.
Ascot, Ariel Re, Everest, Renaissance Re and Swiss Re were named by sources as among the ranks of reinsurers out pitching for ILS capital.
Everest has added significant capital this year, rising to AuM of $1.5bn as of July, up from $1.1bn as of April. Meanwhile, Ascot established ILS platform Leadline Capital Partners with a “major, multi-year capital commitment from a large financial institution,” according to Justin Keith, Ascot Bermuda president and CEO.
Sources also indicate that ILS vehicles have attracted capital from private credit funds.
“In private credit there is a pool of capital, a lot of dry power,” one source noted.
ILS makes a case for discretionary investment
More broadly, sources note that as a discretionary investment, allocators must make the case for ILS against competition with other investment products.
They say equity market volatility in 2024 has emphasised ILS’s diversifying characteristics and ability to smooth out the effects of share price fluctuations.
However, on the other side, more widespread general awareness of climate change impacts on natural catastrophes has made it harder for allocators to advocate for ILS within their organisations.
“You have to have a high level of conviction to raise your hand,” an allocator source said.
Sources also noted that calls for softening on rates, structures, or terms and conditions would make the case harder to win.
“ILS is a choice. You don’t have to do it. The case has been made that it’s a good investment, a good time to be a seller, rates improved, scope of coverage improved,” a source said.
Specific to retro ILS, the source added that investors “will be very disheartened to hear” that rates and terms and conditions are weakening.
This was particularly in the context that US Treasury rates continue to offer around 4%.
“You need to be offering a very good spread to US Treasury, 8%-15%”, the source said.