ILS faces a difficult funding environment, says AM Best

ILS fund managers face a challenging fundraising environment with investor fatigue from cat losses and other problem areas, according to AM Best.

A report from the rating agency suggests problems in 2021 are likely to continue this year, forcing managers to broaden their toolkit and address problems with accumulated cat losses, secondary perils, Covid-19 losses and investor outflows.

While the ILS market’s uncorrelated returns remain attractive, investors are “understandably fatigued” with performance in some sub-sectors, according to the authors of “Re-underwriting and De-risking in the Insurance-Linked Securities Market”.

Amid those losses and redemptions, AUM at some key funds declined in H2 2021 and into 2022, including a $1.4 billion 6M decline in AUM for the market’s largest Nephila Capital and a $0.6 billion decline for LGT Insurance-Linked Partners that pushed the group out of second place on the rankings.

“ILS fund managers faced a challenging fundraising environment in 2021, which is likely to continue in 2022,” the report states.

Managers are re-underwriting and de-risking their portfolios, it says, “as rate increases are no longer a panacea for improving underwriting results and satisfying skittish investors”.

Arbitrage over attachment points and aggregate cover around a sometimes-imbalanced reinsurance market are increasingly common, with moves in the January renewals beginning to address issues.

“With sound re-underwriting and de-risking, ILS managers are taking advantage of current market conditions to rebuild ILS portfolios, with the potential to deliver their target returns but with lower volatility,” they say.

The report also warns that losses from secondary perils are equalling or exceeding losses from primary perils. The models for these “need refinement,” AM Best said.