ILS demand rises amid investor interest resurgence

As the market responds to the impact of Covid-19 and frequent catastrophe losses, The ReInsurer spoke with Schroder Secquaero’s Dirk Lohmann and Stephan Ruoff on the resurgence of investor capital.

ILS is seeing a resurgence of interest from both buyers and investors as the market responds to the challenges posed by Covid-19 and frequent catastrophe losses.

Schroder Secquaero, the ILS manager founded by Dirk Lohmann in 2007 that was fully integrated into asset management firm Schroders last year, has capitalised on this rising demand and sees opportunities for ILS to expand into new classes of business in the future.

Collateralised reinsurance is the largest component of the ILS space and one which saw investor fatigue in the aftermath of large industry losses in 2017 and 2018, compounded by further deterioration of reserves for these events in 2019.

“There were several disappointments in 2017, 2018 and moving into 2019, with issues around adverse development and repetitive hurricane, wildfire and typhoon losses,” Lohmann says.

He says the redemptions which came through in the first half of 2020 and will materialise by the end of the year were evidence of this investor fatigue.

“While there has been a loss of capacity, there will be new money coming in,” he says. “We actually see new inflows as we speak.

“There are a number of people who left and are now revisiting the ILS market. The net impact may be that the sector does not actually grow materially, but it will be good for the market to stabilise in an environment where demand is rising.”

Buyer interest rises

Having founded Secquaero Advisors in 2007, Lohmann sold his interest in the business last year with Schroders taking full ownership. Following the deal, Stephan Ruoff, former CEO of Tokio Millennium Re, joined the rebranded Schroder Secquaero as deputy head.

Ruoff says besides strategic buying interest that has translated into a very strong CAT Bond pipeline so far in 2020, current buyer interest in the ILS space is being driven by the erosion of deductibles by this year’s loss events.

“There has been strong interest in buying protections in the months of May, June and July,” he says. “We’ve seen an acceleration of market hardening, but even with price increases, we saw a very active ILW market in May – a sign people were worried about the hurricane season that was approaching.”

That hurricane season has already seen notable loss events in Isaias and Laura, with seven named storms making landfall in the US before the end of August.

“September is the peak month for the hurricane season, so there is certainly more to come,” he said.

The impact of the early period of the hurricane season, as well as other loss events such as severe connective storm activity or the 10 August Midwest derecho, have prompted strong price increases over the past month, Ruoff said.

“If you look at collateralised reinsurance, the biggest part of the ILS space, here we also see movement. “The renewals in Japan and then in Florida gave very clear signs of the market hardening significantly and collateralised reinsurance portfolios have benefited massively from those renewals as well.

“At Schroder Secquaero, we have previously been underweight in Florida. For the first time we have started to build up a little more capacity in Florida and that is a sign that things are really moving in the right direction,” he says.

Looking ahead, Ruoff sees opportunities for ILS to continue to grow to become a much bigger asset class across other lines of businesses and geographies.

Here to stay

Having set up the business in 2007 and sold his shareholding through the Schroders deal last year, Lohmann says he remains committed to the business he founded and intends to be around for “a number of years”.

He says the clear succession plan the group has in place, through the addition of Ruoff last year, is a sign of Schroders’ commitment to the ILS space and its desire to continue to be a major player believing that its non-affiliation to any (re)insurance entity is a major differentiator.

“That’s very important and it’s unique. In the ILS space, several managers have either been completely acquired or sold big stakes but there has been no clarity as to what happens when the founders want to cash in their chips and move.

“Now I’ve cashed in a few chips but I’m not going anywhere because I love what I do. I’ve committed to Schroders and to Stephan to stay around to keep helping out and look for new ways of developing the business.”