ILS tipping point: collateralised retro to now trump cat bonds
The ILS market’s 2023 hyper-focus on cat bonds with their risk-remote top-layer profile has drawn out a contrarian investor, ready to accept greater risk for eye-opening yields and price upside now visible in collateralised private ILS deals.
ILS investment manager Twelve Capital says the scales have tipped, putting private ILS options like collateralized retro at the top of its risk-return leaderboard. The group may chase options for 20 to 25% yield on peak peril deals.
Prices across the ILS spectrum still have upside after the 2023 rally, but Twelve Capital is now feeling increasingly “conservative” amid suspicion “the potential for price increase is probably limited to a certain extent.”
Lingering upside is tilted away from the cat bonds that have centerpieced the 2023 issuance and rally, Marcel Grandi, Twelve Capital's head of ILS sourcing, told an online audience.
“There is, we believe, more potential for substantial price increases at the middle layer segment, less potential for substantial price increases for the top layer segment or the more risk remote segment,” said Grandi.
Cat bonds, focused on more risk-remote layers, is “exactly the segment where there appears to be more competition of protection providers,” he said.
Cat bonds may have been a natural location from which an ILS rally could begin. Cat bonds can react first to supply and demand changes versus private ILS which gets locked up for at least a year.
What's more, terms and conditions had been tighter and clearer for longer for cat bonds. Only the recent market hardening has cemented the discipline and clarity in terms and conditions for private ILS, including the key question of collateral release and commutation, Grandi suggested.
And amongst the private ILS deals, Twelve Capital likes retrocession above reinsurance. Grandi likes the 16.6% cession rate reinsurers have been giving the retro market and expects it to at least hold amid continuing inflation and demand for limit. And retrocession should continue to enjoy its traditional pricing premium to reinsurance, he claimed.
Compared to reinsurance, retro usually suffers “certain capital constraints” with fewer traditional players making a consistent presence in the market like RenaissanceRe or Everest Re, Grandi said. Roughly half the market comes from ILS.
“We believe that for us, it is the best market to be in.
Did you get value from this story? Sign up to our free daily newsletters and get stories like this sent straight to your inbox.
