Q1: HOW WOULD YOU CHARACTERISE THE HEALTH OF BERMUDA’S ILS SECTOR?
“We see continued growth in the sector.”
Craig Redcliffe: Bermuda has been a major player in insurance-linked securities (ILS) over the years and we see continued growth in the sector. It’s important to EY and it’s important for the jurisdiction.
Greg Wojciechowski: The Bermuda Stock Exchange (BSX) has worked very closely with the ILS market for well over a decade and have very much enjoyed cooperation with the participants, the cedants and everybody who supports the space.
We have had great success promoting Bermuda as a centre of excellence for the creation, support and listing of ILS securities.
At the BSX, we have a unique vantage point as we provide Bermuda’s exchange platform supporting ILS securities and their ability to list on a regulated market to meet investor requirements for transparency and information disclosure. In short, we focused on this segment of the industry very aggressively as we saw a unique opportunity to help position and solidify Bermuda’s position globally in respect of the ILS space.
This year, as the uncertainty of the pandemic began to set in, we were unsure how things would shake out. We weren’t travelling, we weren’t able to meet with our colleagues, we were in lockdown and unable to get a personal read on the market at that point.
But 2020 has been one of our best years. We haven’t seen a slowdown in terms of the number of deals seeking the listing services of the BSX. On the cat bond side, there has been about $42 billion of new issuance, which is at record levels.
In total, at Q3 2020, we have over 500 ILS securities listed, which is over 90 percent of global market cap outstanding. But the most surprising, reassuring and positive thing is that even where deals have been registered outside Bermuda, those deals have sought listing on the BSX.
It is encouraging that Bermuda and the BSX have created that critical mass and value proposition which provide international investors a one-stop shop where deals are originated, supported and listed on an internationally recognised exchange platform.
All things considered, all aspects of the Bermuda ILS platform have held up well through this challenging period and market conditions.
“All aspects of the Bermuda ILS platform have held up well.”
Andrew Hughes: To offer a different angle, performance-wise, it’s been a pretty torrid few years for the entire market, and that has tested investor views on the asset class. Some poorly timed their entry, coming straight into three to four years of losses, and COVID-19 has presented many unexpected new challenges that left some investors scratching their heads.
They might have pandemic exposure elsewhere in their portfolio. That is obviously a market-wide issue, but from an investor’s perspective it’s a mixed bag. Some are very excited about the opportunity; others are licking their wounds and paring back, acting quite cyclically on this.
At Hiscox, it has been pretty stable. We don’t operate in the cat bond market, but we focus on private collateralised, bilateral ILS, which is the majority of the market. Consequently, we are seeing different investor sentiments.
Most of the brokers are saying that we are slightly down on ILS capacity this year, but we have some investors taking capital off, while others are looking to lean into this opportunity in a big way.
There are some who want to commit a lot more cash, and there are some big sovereign wealth funds out there allocating into the space.
Overall, I think it’s positive, but people really want a handle on COVID-19. They want to understand how it’s impacting portfolios. That’s going to be a big theme for the end of the year and will probably drive a lot of market pricing. They want to understand exactly how hard this market going to get.
They have been waiting for a material hardening in the market, and it’s going to happen. Things are looking very positive, but there is still some investor scepticism as to whether or not that hard market is going to be there.
“From an investor’s perspective it’s a mixed bag.”
Tom Libassi: From a performance standpoint, it has been a very good year. We repositioned ourselves a couple of years ago away from sectors of the market that we thought would be impacted by pandemic risk. Investors are clearly fatigued by trapped capital. I know I’m like a broken record on that subject, but unless the asset class solves that particular problem, it’s going to be a short-lived class.
We think we have found multiple ways of solving it. We did a securitisation of the issue earlier this year, which was very successful and was placed with all non-ILS investors.
I agree that after we shut down at the beginning of the year, people thought there would be no flows into it, after fatigue about trapped capital and one of the biggest distress cycles we’ve seen in over a decade.
Fortunately, the distress cycle didn’t happen, the market continued to rally and the only asset class that hasn’t participated has been the ILS asset class. So now we’re noticing significant changes to investor interest. We are going to see growth this year.
“The distress cycle didn’t happen, the market continued to rally.”
Erik Manning: Peak Capital was acquired by Peak Re in April 2020, although the business itself has been around since 2017. Since April 2020 we have more resources and an additional focus with Asia. In a Bermuda context, there continues to be a lot of potential.
Peak Re is constituted on the basis of there being an enormous opportunity to capitalise on exponential growth in the insurance sector across Asia. Asia will continue to be a generator of growth and Bermuda has the opportunity to capitalise on this. We are an ILS manager, but we are also involved in other areas on the ground in Bermuda and that’s something I hope to be exploring with the market at large.
We haven’t suffered the impairments or indeed the issue of trapped capital that others have experienced. However, trapped capital has been a big issue for ILS in general over the last few years and this creates a pretty big hurdle for the industry to overcome if we want to re-establish the trust of investors.
Consequently, we have witnessed investors trending towards products that are either more liquid or less exposed to cat.
Traditional managed ILS products in 2020 are a challenge in relative-value terms. There are many things that people can invest in right now and ILS, which arguably has underperformed in recent years, is simply not one of those asset classes that is seeing massive inflows, leading into 1/1.
However, in 2020 traditional reinsurance entities may be the net beneficiaries of this dislocation. Certainly, Peak Re, our parent company, is expecting global rates to be much improved relative to prior years. So, there is an upside and a downside to all of this.
“Trapped capital has been a big issue for ILS in general over the last few years.”
Rachel Bardon: It has been a very busy year for Hudson Structured Capital Management (HSCM). On the capital inflow side, we definitely saw a slow-down during the spring. That was partly driven by investors, their due diligence was slowed during the pandemic. But it picked up again in the summer and has been strong during the fall.
There was a bit of a delay, but we actually saw a huge increase in capital inflows across the traditional market over the summer. So that seemed to be the focus for investors: on the traditional side as opposed to the ILS side.
On the outflow side, we have had massive opportunities to deploy capital, partly because we are a less traditional ILS fund. Property cat is a part of our book, with the rest in casualty, life and health, other property and financial risks.
We have also seen a lot of opportunities with the Florida domestic insurers, given the distressed situation over there. Distress is potentially an opportunity for us to invest.
On the run-off side, there will be a chance to grow and we have seen a lot of opportunities to invest in that space.
Insurtech continues to have plenty of opportunities, especially on the distribution side.
There has been a lot of talk about rate increases. I don’t know if those increases are actually sufficient; it is a hardening market, but I don’t know if it’s hard enough.
“We have also seen a lot of opportunities with the Florida domestic insurers.”
Tom Mills: From our perspective it’s been an interesting year, especially as everyone’s sought to understand the implications of COVID-19. The uncertainty this created earlier in the year seemed to drive a lot of activity in the industry loss warranty (ILW) market both from traditional and ILS markets as companies looked to shore up additional protection using index-based products as a cleaner, simpler product.
As we approach 1/1, it will be interesting to see whether this trend continues in anticipation of there being less retro ultimate net loss capacity available.
“As we approach 1/1, it will be interesting to see whether this trend continues.”
Brad Adderley: It has been an interesting year and a busy year. To begin with, there was less cat bond issuance but that has picked up and there will be a lot more towards year end. It’s going to be a very strong year end on the cat bond space.
We are still seeing quite a lot of enquiries on sidecars, also interest in the collateralised market and cat bond lites. Some traditional startups are also coming in.
There has been a lot of talk about investors leaving the market, but we’re also seeing new funds being formed and they are large. Traditionally, a new fund would be $100 million, but we’re seeing funds coming to the market north of that. That makes them a more significant player from day one.
I wouldn’t be surprised if by the end of the year we’re seeing record numbers of cat bonds and players in the new fund formation space.
Video on previous page courtesy of Adobe Stock / Hemp1979/Pond5 Image courtesy of Shutterstock / Sander van der Werf
“There was less cat bond issuance but that has picked up.”