A post-COVID buying opportunity

When the true extent of the COVID-19 problem became clear and markets went into freefall, ILS sank along with other asset classes. The market has since started to recover, but still offers a buying opportunity. Bermuda:Re+ILS reports.

Investors have an opportunity to enter the insurance-linked securities (ILS) market at attractive levels, with prices still offering excellent value following the market selloff at the start of the COVID-19 pandemic, according to Andre Perez, founder and chief executive of Horseshoe Group.

“The way rates have gone in June, and our expectations for July, create a great opportunity for investors to enter the ILS market,” says Perez.

“Investors realise this is a good entry point. Since May we have seen that, as things settle down in the financial markets and people get used to the situation with the pandemic, investors are starting to come back to the ILS market.”

ILS were caught up in the malaise when the financial markets collapsed in March. Although ILS is marketed as having low correlation with other assets, in that extreme environment ILS tumbled as investors sold their positions to free up liquidity. However, while there were redemptions for ILS in March, some of those redemptions were later rescinded, Perez notes, and the market for ILS appears to be picking up.

“Once there is a greater acceptance of electronic platforms generally, we will see more interest in a secondary market for ILS.”
Brad Adderley, Appleby in Bermuda

New investors

Perez acknowledges the challenge the ILS industry has faced in attracting new investors to the ILS market.

“Bringing new investors into the ILS market is proving difficult,” he says. “We see some interest from hedge funds and other asset managers but they tend to be more opportunistic in their allocations.

“I always thought that when there was a major loss event it would drive investors into the ILS market in droves. In this event it did not quite happen, and I think that is because investors were so distracted with everything else that was going on in the market.”

He notes that larger investors, such as pension funds, have increased their allocations to ILS, even if those allocations are still very small, relative to the size of their overall portfolios. This is a trend he expects to see continue in coming months.

“ILS is an asset class pension funds have confidence in, and feel comfortable with,” says Perez.

One thing that may help lure more such large investors into the market is greater liquidity, which would likely be generated by encouraging more secondary market trading.

Brad Adderley, a partner at Appleby in Bermuda, believes this will come in time as people get used to doing business electronically.

“Everybody accepts there is too much frictional cost lost in premiums, and everybody knows the market needs to be more efficient,” says Adderley.

“The answer to that is to use electronic platforms, but people are reluctant to be the first mover, they are waiting for others to move first.”

Adderley predicts that as more insurance business is conducted on electronic platforms, people will be increasingly comfortable with the idea of trading ILS.

“The same thing happened with cat bonds registering as special purpose insurers,” he says. “Once there is a greater acceptance of electronic platforms generally, we will see more interest in a secondary market for ILS.”

There are also calls for further diversification of the ILS into new forms of insurance risk. As well as increasing capacity in the insurance market, this would give investors a range of different types of risk to choose from.

“The ILS market is diversifying, slowly but surely,” says Perez. “We see a lot of perils being covered, including cyber, mortgages, contingency and operational risk.

“We can’t expect ILS to diversify into every area of insurance overnight, it is much harder to create ILS out of risks that are not short tail or easily modelled.”

He argues it is more important for ILS transactions to be successful than to be numerous.

“ILS cannot be all things to all people,” says Perez. “It is more important for the industry to pick its battles carefully.”

Perez sees the greatest opportunities for growth in new geographies, rather than in new forms of insurance coverage—at least in the short term.

“There are a few European countries where ILS has been successful, such as France, Germany, the UK and Switzerland, but outside those countries there is huge potential for growth,” he says.

“There have been a few deals in Italy but there is scope for much more there, and across the rest of Europe, for things such as flood risk.”

He believes it will take longer for ILS to conquer new continents.

“We are not quite there yet with Asia or South America,” he says. “The models for those regions are less sophisticated, so it is harder to do ILS transactions.”


For now, Perez acknowledges, the market is still in a state of flux, having not properly settled down following the disruption caused by the pandemic. Florida renewals came in the midst of the selloff in the markets and the heightened market uncertainty, pushing rates and retro rates higher.

Since then the market has shown signs of revival. In June Willis Re structured and placed €100 million of ILS for Achmea Reinsurance Company, the reinsurance arm of Dutch insurance group Achmea.

The cat bond Windmill II Re DAC is believed to be the first cat bond exposed to primary European insurance risk in 2020, and was upsized from an initial announcement size of €80 million, with pricing at a spread of 4 percent, below the initial spread guidance.

The transaction provides Achmea Reinsurance with a single €100 million tranche of fully collateralised protection against European windstorm risk for a four-year period. It features an indemnity trigger on a per-occurrence basis with terms mirroring the traditional reinsurance placement to ensure effective integration within the overall property catastrophe reinsurance programme.

Capsicum Re has partnered with Arch Mortgage Insurance (Arch MI) to raise and place the first reinsurance capacity for Bellemeade Re 2020-1, a special purpose reinsurer, in what was the first mortgage indemnity insurance-linked note since the COVID-19 outbreak.

Capsicum Re obtained $78.5 million of indemnity reinsurance for Arch MI, covering a pool of approximately $44 billion of mortgages, linked to 163,292 loans issued by Arch MI and affiliates primarily in the second half of 2019.

There is some way to go before things get back to normal for ILS.

“There is a lot of uncertainty around ILS related to business interruption exposure through all-peril cover,” says Perez.

“It is not clear to what extent business interruption is covered, and the impact that will have on the retro market.” Late renewals have been a particular problem, he says.

“We always complain about renewals coming in late, but this year it was very late. It highlighted the disconnect between the price being charged for capacity in the market and people’s willingness to pay.

“I think it was partly because people were concerned about the trapped capital issue,” he adds.

In the meantime, Horseshoe needs just to keep on doing what it does, he says.

“People will always need insurance and reinsurance, so we have to keep providing opportunities for investors.”

Image: / fizkes, Image: / SFIO CRACHO,

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Summer 2020

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