Asset allocation protocols could lead to ILS exits: JMP

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Relatively strict asset allocation protocols could prompt some investors to reduce their allocations to insurance-linked securities (ILS), as broader macroeconomic effects and volatility in capital markers mean some allocations may need to be reduced , to stay within the defined thresholds. .

This is a good point made by analysts at JMP Securities, who said that upon meeting a number of ILS fund managers in Monte Carlo at the Reinsurance Rendez-vous 2023 event, they came away with the feeling that ILS capital is not expected to increase significantly in the near term.

ILS capacity remains scarce and raising new funds is difficult at the moment, with catastrophe bonds proving the most popular segment of ILS which is likely to see additional inflows from investors.

The entry tap does not look likely to be turned on significantly, as ILS managers are also increasingly cautious in trying to match new capital flows to available opportunities.

But, after their meetings with ILS managers, analysts at JMP Securities said: “Capital allocated to the sector is unlikely to increase in the near term and there is a reasonable likelihood that it will decline, despite 2022 through now posting strong returns. ”

While recent historical performance is a clear problem that has made fundraising in ILS more difficult, analysts say that “it seems to us that the biggest problem to be solved is the so far troublesome performance of 2022 for the bond and equity markets.

They go on to explain, “Much of the funds invested in the ILS sector come from pension funds, which follow fairly strict asset allocation protocols. With a typical allocation of 95% in bonds and equities and 5% in alternatives (where the ILS resides).

“The problem is that the 95% of bonds and equities have fallen 10-20% this year, thus pushing the alternatives/ILS beyond their relative allocation threshold. If a pension fund is in the UK or Europe, the strength of the dollar can further aggravate the problem.

Falling values ​​of such a large portion of a pension fund’s portfolio could even harm its ability to sustain ILS allocations, given the stringent targets it is often set.

This despite the fact that the market is perhaps as attractive as it has been for years, after the large re-underwriting, the imposition of much stricter terms, conditions and structures, as well as higher reinsurance and ILS pricing.

The analysts concluded: “The most optimistic forecast we heard during our discussions was that ‘investors might let us keep profits’, with others being quite blunt that they will have to return funds to reduce allocation to 5% mark.

“As new funds enter the industry, cat bonds seem to be the favored area, followed by retro, with secured reinsurance largely out of favour.”

Analysts also said after their visit to Monte Carlo that they expected a significant increase in demand for reinsurance at upcoming renewals, with possibly as much as $20 billion in new capacity sought.

It may be difficult for the ILS market to become the provider of a significant share of this, despite the obvious opportunity to do so now, as traditional reinsurers have retreated from catastrophe risk and faced their own macro and inflationary issues.

It’s also important to note that ILS managers with sustainable assets under management and decent results over the past two years are better positioned than others, while some managers also have investors on board who don’t have have not yet reached their allocation targets and should therefore benefit from new contributions later. This year.

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