Change in ILS investor base will insulate against 2008 repeat: Millette

The shift in the ILS investor base since the last financial crisis toward pension funds should help to insulate the market against the scale of withdrawals that occurred in 2008, said Hudson Structured Capital Management (HSCM) co-founder Michael Millette.

Institutional investors that now back ILS managers have made strategic allocations to the sector to diversify and are unlikely to "bolt fast", he said, although he suggested there would be a modest impact on capacity if some sought to cash out "in the spirit of the ATM effect".

However, most pension funds will not face an immediate pressure to realise cash and could find the diversification provided by ILS reassuring.

"The terrifying correlation of every other market on earth that we witnessed unfold quickly as the virus spread is a lesson that allocators won't forget," Millette said.

Back in 2008, a larger proportion of the market was held by opportunistic and multistrategy investors as opposed to ILS firms, but even then, capacity withdrawals only led to a few points of repricing on the bond markets, he noted.

In today's market, tighter capacity would accelerate the rate increases already expected on the Florida market due to smaller, more expensive cat bond issuance, he said.

But gains would likely be limited in size, Millette said, estimating the increases at "under 10 percent more than it would have hardened anyway".

Looking ahead, there could be a greater impact on the high risk-return and retro segments this coming year end, as some opportunistic investors that entered the market for January 2020 renewals will have "moved on" to other distressed opportunities, he said.

However, for the most part, investors of that type are not buying the large bulk of ILS assets, Millette noted.

The HSCM Bermuda executive forecast that the largest hit to the overall (re)insurance market will come from future liability claims rather than contingency or other lines of business, with very little ILS impact on the claims side other than possible payouts under pandemic and healthcare bonds.

During the 2008 crash, the ILS market suffered more drama from bonds defaulting due to their collateral structures and Hurricane Ike, while contending at the same time with the withdrawal of hedge funds and funds of funds.

This time around, the crisis has so far brought less "day-to-day drama" for the ILS market, which could see a similar resurgence after the crisis as it did post-2009.

"The effect of that was affirming on this sector as a diversifier," Millette said.

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