CATASTROPHE BONDS 7


we are also seeing the influx of family offices, endowments, and others.


Many upstream investors have requested access


to bespoke segregated managed accounts. ILS managers have been accommodative and have used the opportunity to provide this service to create more flexibility in the mandate to invest not only in cat bonds but also in collateralised reinsurance.


Some of these mandates have broader risk


appetites as well. With these more flexible mandates, ILS managers have built relationships with cedants by being able


Michael Popkin


7. The price is right. Within certain layers of the risk transfer programme, the capital markets have become more competitive with traditional reinsurers, making it more economic for more cedants to issue cat bonds and enjoy the fruits of full cash collateralisation.


THE INVESTOR’S PERSPECTIVE Although many of


the fund managers have


remained the same, their capabilities, staffing, systems, and expertise have significantly expanded. First, they have raised a lot more money. There are a growing number of managers who have crossed their three-year track record thresholds and have achieved critical sizes of assets under management (AUM) to make them attractive to a growing number of upstream investors.


The numbers and types of upstream investors


have expanded. Specifically, many pension funds looking for uncorrelated assets in a growing market have become educated about the catastrophe risk transfer markets, and have become comfortable allocating small portions of their large portfolios to ILS. In aggregate, those amounts are very meaningful. Moreover,


“After initially viewing ILS funds as minor participants, traditional


reinsurers have responded to the ILS growth by establishing their own third party platforms.”


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participate across a broader component of their reinsurance programmes.


Other cedants have taken notice of these


relationships and have begun to seek out the capital markets. Sometimes they start with cat bonds or choose to start with collateralised reinsurance and then migrate to cat bonds in order to benefit from broader distribution, more price discovery, and increased competition.


After initially viewing ILS funds as minor


participants, traditional reinsurers have responded to the ILS growth by establishing their own third party platforms. As the heterogeneity of mandates increases, it is logical that new cedants will engage more broadly with the capital markets, whether they are standalone ILS funds, reinsurers with their own funds, or both. In fact, the distinction between the two groups is rapidly fading.


We have seen new entrants into the markets.


Some of these are created as mutual funds which are expanding and diversifying


the upstream


sources of capital. Others are extensions of global asset managers who have begun to allocate to ILS for its value as an attractively priced asset and different risk profile.


ILS funds operate under a different model.


They manage funds that have different risk and return parameters. Unlike traditional re/insurers who have rated balance sheets, with all the pros and cons, ILS managers can have a whole range of different funds for different categories of investors. Some investors will want high risk/high return. Another upstream investor will desire low risk/low return. Some may desire highly diversified portfolios. Others may prefer highly concentrated portfolios.


As the size and range and diversity of the funds


under management expand, ILS managers have become an increasingly relevant and attractive partner.


deeper to


Rick Miller


Finally, many of the ILS managers have become part


of larger businesses. This has


allowed them to increase their staffs and add other valuable resources to their teams, such as cat modellers. It has also made the capital raising process much easier. n


RECOGNISING THE VALUE THAT CAPITAL MARKETS BRING The market is growing and changing. More cedants are recognising the value that capital markets can bring them. The cash collateral and different risk/reward appetites of different funds open up a new range of opportunities.


We will see new cedants and new perils. Some deals will have Others will have


features that mimic


traditional reinsurance, such as cascading structures. Traditional reinsurers and ILS funds will each have


their own


efficiencies and their own places within the risk transfer tower. Sometimes they will compete directly and sometimes, the same firm will provide capacity in both a traditional and alternative manner.


As the markets and funds continue to


develop, we’ll likely see more corporates and public entities begin to engage with the ILS markets. The larger cedants will mainly find their way into the public cat bonds whereas the mid-sized cedants and/or those looking for more customised solutions will gravitate toward the private cat bond market. Either way, the markets are opening up to new cedants and opportunities.


longer tenures.


INTELLIGENT ILS JUNE 2014


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