December 5, 2023

Opportunities to raise capital into mortgage reinsurance investment funds remain much slower in the insurance-linked securities (ILS) market compared to cat bonds, boosting hopes that the hard reinsurance market can extend into 2024.

water flowWe understand that the pace of the cat bond market, which is even thought to benefit from new capital inflows into mortgage reinsurance and retrocession strategies, remains slow.

Multi-tiered reinsurance towers that have been backed by private ILS fund capital for years are now being diverted in some cases to the catastrophe bond market as cedents want to maintain some degree of diversity in their venture capital sources and insist that the capital markets back them Certain layers of the tower.

While there is uncertainty about how capital flows will flow later in the year, conversations about financing continue once hurricane season is over, with most sources still seeing mortgage reinsurance and retrocession strategies in 2023.

This means that any net increase in ILS is considered most likely to be driven by an expanding and more liquid cat bond market.

Many see this as a good sign for those looking to extend current hard reinsurance market pricing levels into 2024.

Any sign of significant softening in rates in the private ILS market at the moment could be seen as a headwind, as investors still want to see higher returns and improved terms, some investor sources said.

They expect ILS fund managers to look to keep rates on hold to demonstrate their discipline and say this will provide the encouragement they need in time to start adding their allocations back into private ILS fund strategies again.

The same is true of cat bonds, of course, with some investors becoming more cautious about the outlook for cat bonds as they believe the market has softened as much as it needs to (and in some cases softer).

Still others argue that the recent weakness in cat bonds is actually just a correction to the overextended cat bond pricing seen earlier, rather than a start to weakness. As the year continues, it will be interesting to see how that plays out and whether the price multiple can be maintained into the fourth quarter, when we are told that circulation may pick up again more meaningfully.

John Dacey, Swiss Re’s chief financial officer, told a recent analyst conference at Goldman Sachs that ILS funds are not currently involved, so the capital supply imbalance in reinsurance persists.

Because of this, Dacey believes this difficult market cycle is likely to be more prolonged, with other factors related to inflation, catastrophe and weather losses, higher interest rates, etc. all influencing investor motivation and the conditions for sustained higher reinsurance pricing .

While rate hikes may slow, Swiss Re’s CFO believes that the hard pricing we see today could persist until January 2024 renewals, as the lack of ILS inflows is a key support for rates.

Another analyst note this time from Berenberg said there was “virtually no new equity capital raised and no net inflows into the mortgage ILS market,” which is expected to support the hard market for a longer period of time.

We still hear that the larger mortgage ILS fund managers have had some success raising capital, but inflows have largely replaced capital that has been trapped, lost or exited in recent years, and there is still some bleed in the investor base as The door to exit We understand that the strategy has been reached.

However, while net inflows may not add to the mortgage and private ILS side of the market this year, there is potential for further increases in deployable ILS capital as we continue to hear about the release of trapped capital, particularly in relation to last year’s Hurricane Ian.

We’re told that this is helping some ILS funds plan year-end renewals with more funds available than twelve months ago, so that’s a dynamic to watch out for.

Deployable ILS capital has been steadily increasing as some recover from trapped situations. This, along with the capital already raised, does mean that by January 2024 renewal, the private ILS market could be larger than it was at the same time last year, with more renewal coverage firepower available.

But capital levels aside, the ILS fund manager community appears to be very motivated to stick to tighter rates and pricing for longer, determined to deliver the returns investors are looking for after several challenging years.

Traditional capital inflows and new startups are wild cards as there are investors ready to fund the opportunity, although they do tend to seek differentiation rather than the catastrophe-focused approach we’ve been gravitating to to start-life majors Re/insurers are seen in a new “category” of companies.

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