ILS managers may struggle to raise funds, must learn new tricks: AM Best

ILS fund managers are likely to face further fundraising difficulties in 2022 as the industry continues to grapple with the fall-out from prior cat losses and investor fatigue from select problem areas, ratings agency  AM Best has said.

"ILS fund managers faced a challenging fundraising environment in 2021, which is likely to continue in 2022," AM Best authors wrote in their report “Re-underwriting and De-risking in the Insurance-Linked Securities Market.”

ILS managers have been forced to expand their toolkit to address the full scope of problems with accumulated cat losses, secondary perils, Covid-19 losses and investor outflows.

"ILS fund managers are re-underwriting and de-risking their portfolios, as rate increases are no longer a panacea for improving underwriting results and satisfying skittish investors," authors write.

AM Best sees more of the work now in the arbitrage over attachment points and aggregate cover around a sometimes-imbalanced reinsurance market.

"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," authors claimed of the upshot of January renewals.

In theory, the ILS market remains broadly attractive for providing returns that are uncorrelated to capital markets. In practice, "investors are understandably fatigued" with performance in some sub-sectors, authors wrote.

Heavy natural catastrophe in 2021 cast a pall over a segment already saddled with heavy prior cat loss. 2021 cat losses rivalled 2017. And losses from secondary perils "are now equalling or exceeding losses from primary perils."  Those models "need refinement," AM Best said.

Covid-19 losses have not yet been as severe as anticipated, but IBNR losses have trapped capital in the system.

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.

The list of groups with AUM over $5 billion is rounded out by Leadenhall Capital Partners and RenaissanceRe Capital Partners, both down over the past 6M. Only Fermat Capital Management, now the market's second largest, has shown an increase.

Total market capacity may have been neighbourhood $94 billion at end-2021, AM Best and Guy Carpenter estimate, with caveat that measures of how much ILS capacity is untrapped and deployable are increasingly difficult.

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