NEWS

Flight to quality in the cat space

A flight to quality of investors now applies to all investment opportunities in the property-cat space: TigerRisk.

A flight to quality has taken place by investors that now applies to all investment opportunities in the property-cat space, Jarad Madea, head of TigerRisk Capital Markets and Advisory, told Monte Carlo Today.

This is one factor leading to capacity shortages in the space, he said. Another is that most private equity firms comfortable with investing in the re/insurance space already did that so in 2020/21—and most industry veterans with the track record to raise capital have already formed ventures.

All this amounts to a very tight market for property-cat capacity. “We saw a flight to quality by insurance-linked securities (ILS) investors after the losses of 2007/08 when, after some heavy losses, they became more discerning about which managers they would use. Now, we are seeing that same phenomenon across all the other ways investors might move into this space,” Madea said.

“Whether it is through traditional capacity, sidecars, managing general agents, Lloyd’s, retro or ILS, we are seeing this in every pocket of the business. People’s track records are being examined; investors are being very selective.”

He explains that, while almost no cat manager will have emerged unscathed from the past five years in terms of losses, investors are conducting historical analysis—applying today’s market conditions to a portfolio and seeing how it would have performed over the past five years based on different loss scenarios.

“There are a lot of assumptions in that, and everyone’s track record is chequered in some way, but the key is how they compare to their peers. You can’t hide underperformance. Reputation goes a long way as well but the due diligence we are seeing is more thorough than ever.”

“People’s track records are being examined; investors are being very selective.”
Jarad Madea, TigerRisk

Madea is heading TigerRisk’s so-called SWAT team, a unit within the broker dedicated to finding new investors willing to take cat capacity—or existing ones willing to take more—in the context of a capacity crunch, so he is at the heart of the intersection between the capacity needs of cedants and investor appetite.

“There are many ways investors can deploy capital and enter this space. It is a question of finding the best fit,” he said. “We do that in a systematic way.

He explains the reason more private equity firms are not entering the sector. In short, he said, most of those with the existing appetite and understanding of the industry to do so, already made their move in 2020/21. They backed a relatively small pool of industry veterans with the track record to secure backing.

For those private equity firms left, it is difficult to find the right team of executives to back—plus they are now seeing a wider range of other investment opportunities as interest rates rise. This means some are allocating less capital to alternative asset classes, of which ILS is one.

“Most PE investors are already in, leaving a smaller pool. And who would they back? They are also part of that flight to quality,” Madea concluded.

Main image: Shutterstock / Sergey Nivens