ILS markets price Ian losses at top of estimate & focused on investors

Insurance-linked securities (ILS) markets have already priced in Hurricane Ian losses close to the $75 billion upper end of estimates and may be set to take well above their traditional share of the hit, analysts at Lane Financial have stated.

“We consider the early market ILS response to Ian to be fully priced,” analysts wrote from indicative pricing as of October 7. “It is implying/assuming an Ian loss at the top end of the range of most model estimates.”

ILS are likely pricing their own losses at “a much bigger share” of the total event loss than has been the case for prior major events.

Sifting out market losses most attributable to Hurricane Ian, Lane Financial finds ILS investors assuming they will take a $1.9 billion price tag on Ian, some 3.6% of the CoreLogic total loss estimate of $53 billion or 2.5% of the Stonybrook estimate of $75 billion.

Those loss share totals, if borne out by the eventual accounting, would show a continuation of a trend for rising ILS contributions, Lane Financial authors contend.

Had the ILS portion of market losses risen at the 35% pace that assets under management have grown since 2017, the current ILS share in losses would be a mere 1.55%, well below the 2.5 to 3.6% numbers rendered in the current rough accounting, Lane noted.

Some fundamentals do drive the rising loss share, Lane suggested. The amount of aggregate coverage in ILS bonds on the market has increased over the period since 2017 and “some other recent weaker terms and conditions” may also have played a part.

The simultaneous mark-to-market losses of ILS instruments not attributable to Ian might point to the market's pricing needs moving forward, Lane additionally argued.

Those demands appear rich. Ian may force “a market next year as hard as any in recent large catastrophe memory." Losses point to a market “requiring a 20-30% increase in multiples from pre-Ian levels,” Lane analysts wrote.

Lane can identify nearly $1 billion in mark-to-market losses as mere indirect collateral damage from Ian. Multiples against theoretical constant expected loss are a historical match to post-Katrina or post-Tohuku, analysts said of their estimates.

The full set of estimates may prove shaky, Lane analysts admitted of their early read.  They call their numbers a “market-based educated guess” with caveat for “some heroic/controversial assumptions” (notably a 20% price drop as threshold for identifying an event-impaired security).

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