1 month ago
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Some investors have started to experience benefits from the outperformance of investments in the private reinsurance segment compared to catastrophe bonds, after softening of pricing had been seen in the second quarter, Pascal Koller Partner and Portfolio Manager at LGT ILS Partners Ltd., recently commented.
Speaking with Artemis in an interview around the reinsurance conference season Koller stated: “The market for cat bonds was able to absorb a significant volume of additional transactions in the course of the first half year of 2024. There was therefore a healthy increase in capacity in the cat bond segment, and as a consequence, pricing for new bonds has seen a softening in Q2.
“This allowed protection buyers to place bonds in the market at more attractive prices compared to the traditional reinsurance segment.
“End-investors allocating in the ILS space can thus capture a higher level of return when focusing on the segment of private reinsurance transactions. At LGT ILS Partners, we are estimating this outperformance of the private market vs. the cat bond market (at unchanged risk levels) at up to 200 bps.”
Furthermore, approximately 80% of the cat bond market is allocated to covering the risk of US hurricanes. This concentration poses a substantial downside risk, particularly for the European wealth management segment of the UCITS cat bond funds, in the event of a significant hurricane season.
However, the private reinsurance segment enables a significantly more extensive diversification, Koller highlights.
Despite the potential benefits of investing in private markets, many investors remain hesitant to allocate funds to funds with a focus on this segment. One of the primary reasons cited for this hesitation is the lower performance of private markets in recent years, particularly in loss-heavy years such as 2017.
“Yet, such an assessment does not include the fact that funds with a higher allocation to private reinsurance transaction are typically managed at a higher risk levels, to balance out the limited liquidity of the private segment vis-à-vis cat bonds,” Koller added.
He continued: “Also, investment managers such as LGT ILS have reduced the allocation to some of the more challenging structures such as aggregate placements and specific covers for secondary perils such as floods, resulting in much more robust portfolios.
“Many investors do not realize that over 50% of outstanding cat bonds are still structured as aggregate placements, whereas at LGT ILS Partners, we have reduced this allocation to well below 10% in the private segment.
“And the remaining aggregate deals in our portfolios are only technically structured as aggregates when they require, in fact, a very significant first loss event, and are linked to elements such as covering aftershocks for earthquake covers, and therefore respond more like an occurrence cover would.”
For effective participation in the private reinsurance segment, an ILS manager needs an efficient fronting solution. To that end, LGT ILS relies on its in-house rated fronter, Lumen Re, which plays a pivotal role in its value chain.
Koller explained: “We can transact with insurers worldwide on the back of Lumen Re’s rating and without posting collateral. In fact, the recent recognition of Lumen Re as a Reciprocal Jurisdiction Reinsurer in the US further mitigates the requirement to post collateral for losses. Lumen Re allows for a very efficient transaction process for all involved parties; investors benefit from zero drag or dilution in allocated capital from trapped collateral.”
He concluded: “At LGT ILS Partners, we already see a revived investor interest for the private insurance segment; similarly to a decade ago, it is again investors with short decision processes, such as foundations and family offices, that are currently allocating in the space and therefore benefit from the outperformance of the private segment vs. cat bonds.”
English (US) ·