14 November 2014ILS

ILS poses a threat: ILS Convergence

Bermuda:Re+ILS has reported from the ILS Convergence 2014 conference that ILS is here to stay and poses a threat to some of the smaller traditional reinsurance companies.

“With ILS we’ve been a little more cautious recently,” said Jonathan Malawer, managing director of K2 Advisors. “We look at things from a tactical perspective– we look at asset class, historical pricing, terms and conditions. We think now is the time to be cautious, given the lack of insured losses and influx of capital into this space. We think it still makes sense for institutions to have a foothold, be patient and wait for the cycle.”

Jay Cohen, managing director for Merrill Lynch, said that whereas with traditional reinsurance you would have someone to source, finance and underwrite the risk, now some of the financing is being done through third parties and this is putting some pressure and uncertainty on reinsurance companies.

“I think this is generally a threat for the reinsurance companies, especially the smaller ones on the island,” he said. “One question I get asked a lot is: what if there is a big event - will this money go elsewhere? I don’t think so because there is so much of it and the avenue for this money to come into the market is so well paved now. I think there has been a permanent change in the business.”

John Brynjolfsson, founder and CIO of Armoured Wolf, said that in the present environment, within the ILS sector he would tend to keep the maturities shorter.

“That allows you to have a lot of rollover opportunities, a little bit higher quality. I think the biggest risk investors can systemically fall into is yield targeting – if you have a return target of 8% and spreads get tighter, you don’t want to fool yourself into increasing risk and leverage when spreads are tight – that’s buying high, which is the opposite of what you want to do.”

Instead he counselled being comfortable with less returns. “Be strategic – now would be the time to take advantage of short strategy funds,” he said.