Fund launches and capital inflows to ILS managers over the past couple of years have indicated a resurgent ILS market post-Covid, albeit one that has tested the industry to respond to changing investor demands.
The rotation of the investor base has been a significant undercurrent, with the composition of the market shifting, as private equity capital moved in to take advantage of elevated post-Ian spreads, then stepped away again.
Meanwhile, pension funds have gently declined as a proportion of the sector total, while remaining core, especially as losses mounted from a series of high cat loss years starting in 2017, then Covid. As investors who lost the faith looked to exit, a series of run-off deals across the segment have helped in freeing up capital that was being held against future loss development.
The lessons learned from that period ushered in some investor-focused improvements on aspects like buffer loss thresholds, trust agreements and time clauses, now generally adopted.
Those dissolving institutional allocations were offset coincidentally by inflows starting to grow from another corner of the capital markets – multi-asset managers and wealth managers. As capital deployed by this cohort has grown, and in addition to retained profits from 2023 and 2024, it has supported market growth.
The ILS segment added around 12% in AuM in the past two years, reaching $110bn as of January, according to Insurance Insider ILS’s latest survey of managers for the Insurance Insider ILS Fund Directory.
The multi-asset manager/ wealth manager capital has mostly flowed into cat bonds, fuelling growth of that segment by a third over two years, to $45bn of bonds on risk in total as of year-end 2024, according to data tracked by this publication. This has taken bonds to around 41% of the ILS total, up from 39% in 2023 an 35% in 2022.
Last year, $17bn of fresh limit was placed in the bond market, a record for new issuance volume and the second record-breaking year in a row after nearly $16bn of new bonds placed in 2023.
At least nine new cat bond funds have launched over the past two years.
Several managers canvassed by this publication sounded a note of caution around the theme of “sustainable growth,” given that expanded capital supply can suppress rates, unless demand expands in tandem.
Others were less convinced that calls for moderation in capital-raising could win out, commenting on the concept of handing capital back to investors: “Nobody is going to do that.”
However, as an offsetting dynamic, sources note the rise in interest from capital providers in accessing casualty/ specialty risks. While the investors looking to target the space tend to be more private equity focused, there is some crossover with cat ILS investors. More generally, the casualty/ specialty segment is viewed as a new and growing arena where capital can be placed, soaking up (re)insurance risk demand.
The investments are viewed by potential capital providers as a source of diversification, even if they may come with a higher element of correlation to financial markets than a catastrophe bond.
The partnerships between third-party capital and casualty/ specialty risk also offer the promise of potentially expanding the reach for ILS, since they bring into scope primary MGA portfolios in addition to balance sheet (re)insurer books of business.
The MGA-focused deals have included the $270mn Fractal Re, which brought investment house Stone Point Credit together with MGA Starwind Specialty for a casualty-focused transaction.
Last month, this publication reported that Ryan Specialty Underwriting Managers was targeting around $300mn of third-party capital for a sidecar to write a global, all-lines quote share of its book, with target premiums of around $400mn.
Sources also reference the AIG/Blackstone pairing, on a third-party capital-backed reinsurance syndicate at Lloyd’s for 1 January, as an example of creative structuring that has allowed capital to access a diversifying seam of risk.
With behemoth Blackstone on the deal an ILS manager was not needed, however other such innovations may yet require an ILS investment advisor.
Casualty/ specialty focused deals potentially allow investors to deploy at scale and in some cases are being seen as the preferred option versus buying a balance sheet carrier. “The exit is more certain – you can get in and get out at book value,” notes a broking source.
This is true more broadly of the ILS sector and has factored into its return to growth, at a time when equity start-ups generally have been hard to do. Former Axis Re CEO Steve Arora and former Hannover Re CEO Willy Zeller last week on LinkedIn officially called off their attempt to launch a global multi-line P&C balance sheet reinsurance company.
ILS market 2.0
These market trends speak to the wider ILS market theme of a maturing industry that has understood more about what drives end-investors and got better at designing offerings that are more tailored to their needs.
In general, this has equated to cleaner structures designed to deliver fewer surprise losses, as well as enhanced liquidity options and better reporting. It has also motivated parties to explore the potential for more bespoke structures, with one source describing this as moving away from a “take what you are given” mentality.
Looking ahead, the potential to extend the coverage provided to end-users in primary markets is one area of focus for players with an eye to grow ILS AuM ultimately. In this, the sure and steady increase in penetration of parametric coverage is expected to play its part, with the cat space particularly in scope.
The Twelve-Lumyna Capital Parametric ILS Fund announced in February is one of the first out of the gates in this space, and will be one to watch over near-term.
The quick-payout, triggered-or-not, binary nature of a parametric cover has a direct read across to investors’ demands for more simplicity around valuations and exits, at least on the surface of it.
The ultimate proof will be in how the coverage performs for buyers and sellers as it is inevitably tested by events over time.