The ILS fundraising scene has shifted a gear in Q4, with additions to cat bond and private ILS strategies coming from new and existing investors, and allocators returning to the space after exiting post-2017, according to sources.
More managers have raised funds than not, sources suggest, although some of the additional assets under management are retained earnings, chalked up as a win, particularly where allocators had neared or surpassed caps on their ILS percentage.
In other cases, profits have been taken off the table, with sources indicating this has helped to demonstrate the value of ILS to investment committees.
New investments have been balanced to an extent by exits though, as opportunistic capital that entered post-Ian for a short-term play exited ahead of anticipated rate softening.
Sidecars are also attracting more attention from managers and end-allocators, particularly as cat bond spreads continue to fall from their post-Ian peaks, although total investor numbers in this segment have stayed flat.
Returns fuelling investor confidence
The gear change is results-driven, with investor confidence buoyed by returns remaining strong even as 2024 brought two major landfalling hurricanes in Helene and Milton, severe convective storm losses in the US Midwest and further bouts of flooding in Europe.
The increase in attachment points across insurance and reinsurance markets post-Ian helped to keep nat cat loss impacts to a minimum, and the shift is helping to sustain a rebuild of investor confidence.
Underperformers were those who had written outsized shares of, for instance, central European flood-related risks, or “very directional” US wind plays, said a source.
Low-attaching aggregate deals are said to be most impacted by Helene and Milton, with an element of capital trapping going into 2025 and more clarity on losses expected in Q1.
Indications on full-year results are that they have been “really impressive across the board,” according to one source.
Canvassing multiple sources suggested returns of 11%-14% in cat bond funds.
The general range of returns for reinsurance quota shares is 20%-40%, with a few sidecar performances coming in higher.
“A generic, all-risk sidecar deal should come in somewhere around the low 20s,” said a source.
They added that many of today’s deals are more nuanced and tailored than this, and that annual returns encapsulate multiple aspects of a deal’s structure.
“Specific risk-return profiles merit different costs. Different performances merit different fee structures,” they noted.
Mid-to-higher-risk private collateralised re property cat contracts are returning a ballpark 15%-17%, and retro is providing high-teens-to-low-20s returns, sources said.
The performance across the sector tells a strong story on relative value. The benchmark BoA BB US High Yield bond index returns are running at about 7% this year.
Investor base rotation
Strong performance has positioned the industry for growth, with an active rotation of the investor base occurring, according to sources.
Opportunistic investors who entered to take advantage of market dislocation in early 2023 are now leaving the space.
Meanwhile, sources noted that several investors who redeemed their positions after taking losses in 2017-2021 are taking a fresh look at ILS, with several of these understood to have re-entered with fresh allocations to the space.
There are also new-to-ILS investors, mostly allocating to cat bonds, and existing investors in some instances re-allocating from bonds to private ILS or making additions to private ILS.
“Investors who can afford to sacrifice some liquidity may look at private reinsurance for a higher risk-adjusted return,” a source said.
Sources anticipate growth in private ILS through 2025, with $120bn-$130bn of total ILS capital “not out of the question”, according to one commenter.
This would be an uplift in the range of 9%-18% from $110bn currently, according to figures from Aon Securities.
Capital inflows and rate outlook
That said, with $4.2bn of cat bond maturities due in Q1 and $4.9bn in Q2, according to data tracked by Insurance Insider ILS, in addition to retained earnings, the cat bond market is poised to be flushed with capital.
There is also fresh capital in reinsurance in the form of the $650mn raise by start-up Mereo, and in retro, $300mn-$500mn for ILS start-up Perren Re.
A combination of retained earnings, bond maturities and new capital in the segment all points to reinsurance rates declining, although not as much as was thought likely in early September, before hurricanes Helene and Milton.
“If rates come off by 5% or 10%, we are still in an environment that’s probably second, third or fourth highest risk-adjusted reinsurance pricing environment ever,” said a source.
They added that end-investors are more focused on terms and conditions – attachment points, ceding commissions and fee structures – rather than rate, with headline rates not impacting on capital raising all that much.