September 2014 58 Bermuda:Re/insurance+ILS


Diversifying the market


Meanwhile, the past 18 months have seen a raft of new issuers as cedants have grown increasingly comfortable with the capital markets and have sought to benefit from increasingly attractive pricing. Their entry has helped to diversify the market, grow its capitalisation and provide a greater diversity of risk for investors hungry for convergence capacity.


As Michael Popkin, managing director and co-head of ILS at Jardine Lloyd Thompson Capital Markets, explained: “Given the current supply:demand dynamic, it is important for prior issuers to return with larger size and for new issuers to come to the market, bringing new perils and geographies.” Popkin said that he had seen particularly strong interest for diversifying bonds, with ILS managers “looking for ways to manage their funds in a relatively more diversified way”.


He added that the current environment would likely mean that “higher coupon and higher risk deals may prove to be relatively more attractive than the current string of remote risk product which hit the market this past spring”.


Dubinsky said that while investors always welcome new sponsors,


it tends to be the incumbents who have communicated with investors, been transparent regarding their risks and told their story well that can expect to strike the best deals in the market. “New sponsors have to overcome a presumption that ‘You are new. Why are you here?’”


Market diversity is also being delivered through so-called cat bond


lite transactions. Popkin said that their impact on pricing has been limited, but said “They are an excellent way to bring more cedants and more diversifying risks to market. These private placements make it economic for cedants who would otherwise not come to the capital markets to begin to engage with these markets and start to build longer term relationships with ILS funds.


“For the ILS funds, these deals provide a valuable and necessary source of investment opportunities.”


Dubinsky added that such transactions have considerable potential,


even if for now they are competing with collateralised reinsurance for market share.


Where now?


Addressing the likely future heading of the market, Cangany agreed that the pace of capital coming into the convergence market has slowed, but that capital will continue to enter the space. “ILS managers will continue to attract money into existing vehicles and they will naturally expand as their business models achieve success,” he said.


“ILS managers will continue to attract money into existing vehicles and they will naturally expand as their business models achieve success.”


Schultz likewise argued that a slowing is likely, adding that “having discipline about where you are going to deploy your capital is healthy—a market that is cognisant of return levels and risk”.


“What is positive is that you don’t need the entire market to get deals done,” said Schultz. “Capacity is becoming more significant and you are starting to see investment preferences coming out—remote risks versus more risky bonds. Balancing those preferences is helping to bring more investor appetites into the space.”


Dubinsky said that he expects capital levels entering the market to remain steady. “Pension funds are making allocations over the long- term and know that if they pile all their money in at once they are going to put the market out of balance.” Add to this minimum return hurdles, and Dubinsky expects more of a slowdown in the levels of capital entering the space than a turning-off of the taps.


Rick Miller, managing director and co-head of ILS at Jardine Lloyd


Thompson Capital Markets, concluded: “We believe strongly that pension funds and other upstream investors are here to stay. Moreover, when we do eventually see spread widening driven by a cat event, we anticipate that some of the dry powder will find its way into our markets to moderate any significant spread widening.” 


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