The change in fortunes of the ILS market over the past two years was readily apparent in the sentiment at this publication’s ILS Connect conference in New York, which this year and in 2022 fell during the early days after a major Florida hurricane.
Despite the similarities in Hurricane Ian and Milton’s ultimate track and potential range of losses, the difference between the jitters of 2022 and the unfazed reaction this year was stark.
With the loss ranges for Milton still wide, the prevailing view within our panel of ILS experts at least seemed to be geared to the lower end of the range, with estimates coalescing around $30bn.
The reasons cited for this include the greater resilience of housing stock in the Sarasota area, prior roof replacements from storms including Ian and Irma, and the impact of legal reforms.
But even assuming Milton remains a $10bn-$20bn smaller loss than Ian, this is not what is really driving the more relaxed attitude.
Instead, it has far more to do with the changes of the reinsurance reset of 2023: higher attachments and rates that delivered investors a tub-thumping set of returns in 2023, and have put many strategies on course for a strong year, even with an earnings loss impact from Milton.
Older trapped capital has been cleared away, and new solutions to enable exits for investors in private ILS strategies have been tested.
So if Hurricane Ian was the tipping point that created pain but ultimately healing for the ILS market, Milton is being seen as more of a proof-of-concept event that shows managers learned from that experience, and that of the prior years.
Nephila’s head of property cat, Jessica Laird, said that the event could be seen as a “validation” moment.
“What's really important when you're having these conversations with investors and capital is to demonstrate that you are getting compensated for this [level of catastrophe loss activity].”
With that said, there was also an acknowledgment that Hurricane Milton might not be a severe test in this way.
Tangency co-founder Dominik Hagedorn said that at the insured loss levels discussed, “it's a little too low of a loss potentially to really test that, as everyone has moved up. The real test would have been a $50bn or $75bn [loss], which potentially we may not be seeing from this.”
Later in the day, our investor panel came back to this theme.
“It runs a risk of creating some false confidence,” said George Evans, MD and head of relative value at Aksia, referring to the potential for some new investors to allocate without understanding the nuance of what would have happened if Milton hit 15 miles north.
However, the ILS manager speakers said they did not see a risk from this, conscious of the need to show strong returns over a longer period.
“What investors are going to need to hear to maintain that conviction, either staying in the space or to bring them into the space, is that there is continued discipline around underwriting, attachment level structuring and the compensation for that risk,” Laird added.
On the cedant side, for both ILS managers and reinsurers there may be challenging conversations if these losses remain primarily retained events. This week, as results season kicked off, Guy Carpenter projected cat pricing would flatline, having previously expected significant declines.
But for top layer cat risk, competition has been strong in recent years.
Aon Securities CEO Richard Pennay acknowledged that managers would prefer rate softening over lower attachments but suggested the more remote trend of the market could be a topic for challenge from cedants.
“If we find that the ILS products are all too remote, then ultimately, when clients look to hedge out and seek protection, it can become problematic if everybody is hanging out at the $100bn level.”
Fundraising impact
A perennial question after a major event is how future investor appetite will be impacted.
Our investor panel did not expect the event to move the dial on fundraising. Matt Holland, head of risk at New Holland Capital, predicted that at the margin, there could be more inflows. For investors on the sidelines who were very close to allocating, there could be a helpful price benefit in the absence of downward pricing pressure, he suggested.
Albourne senior analyst Chantal Berendsen said there was interest from investors, but whether that translated to mandates remained to be seen.
On the cat bond side, Pennay noted that high levels of collateral yield, along with premium coupon, have put managers in a strong position in terms of cash on hand. “We don't see a significant amount of trapping from cat bonds to really slow down the market going into 2025.”
There was some hesitation or variance in opinions over how impacted the higher-risk end of the ILS market might be, with some panellists suggesting performance could still be strong and others forecasting a breakeven-to-negative year.
By their nature, first-layer Florida risk and reinstatement premium protection deals will be heavily hit with claims.
These deals, along with retro covers, tend to be the collateralised deals that do not benefit from fronting carrier leverage to soften the impact of trapped capital.
On the opaque retro market, where some but not all ILS products may be more second-event in nature, and with uncertainties over Helene’s size in terms of being an activation event, there were variances in whether participants expected trapped capital to be meaningful.
But even assuming 15%-20% of the retro market is trapped, this would be several billion that in the totality of the ILS market is not particularly noticeable. (However, it is worth noting retro capital does have a leveraged influence on broader reinsurance conditions, so small sums can be impactful at times.)
Milton was of course not the only topic of debate: many side conversations covered other new areas of development in the ILS market.
This in itself reinforced the manageable nature of the storm, which has not dented an overall buoyant ILS market. While a larger test could have shaken up the market, and this test may be more of a business-as-usual situation, in many ways what the ILS sector needs now is a phase of solid performance.