Bermuda’s Insurance Linked Securities (ILS) marketplace has proven to be resilient over the years. The Bermuda Stock Exchange (BSX) has significantly outpaced other global markets and now lists more than 300 insurance linked securities, collectively representing USD30.92 billion, with international debt listings climbing 20 per cent in 2018 to 201 vehicles.
As the BSX Chief Compliance Officer, James McKirdy, stated: “In 2018, the BSX saw positive listing activity across most sectors. Listing activity was strong in international debt and insurance linked securities (ILS) with both again reaching record levels.”
Sarah Demerling (pictured) is a Partner in the Corporate, Finance & Funds Group at Walkers Bermuda. Demerling joined in January 2019, and while she is far from new to the ILS space, with years of commercial experience, she is excited to be at Walkers, who are relatively new to the island.
“The ILS marketplace has again proved its resilience. This was further reinforced last year with additional natural catastrophe losses, yet investor appetite remained strong. The capacity is still there and existing ILS managers are putting in more assets. We also see new ILS managers coming to market, so notwithstanding the fact that the ILS market has been tested (by loss events), it would still appear to be following a growth trajectory,” says Demerling.
Walkers is one of the industry’s leading global law firms with more than 800 people across 10 offices. It is a ‘go to’ law firm for those wishing to set up ILS vehicles in Bermuda, thanks in part to its strong corporate and insurance practices.
Alongside Demerling, Peter Dunlop also recently joined Walkers as a partner, bringing years of experience in insurance and reinsurance law and underwriting to the table, specifically in respect to new insurance products, policy and contract drafting, and ILS structures.
“Pete brings a lot of commercial working knowledge to the business, having worked as an underwriter for a number of years, and I’ve served as an independent director to various ILS vehicles so, in addition to our legal backgrounds we are familiar with the client side of the industry,” adds Demerling. She notes that whilst the last two years have been challenging for the ILS market – the Eurekahedge ILS Advisers Index (which is not a market cap-weighted index) was down -2.98 per cent in 2018 – the asset class has become trusted and more widely adopted by institutional investors.
“The reason for the asset class’s popularity is diversification for the manager and investor, and the fact that ILS performance is not correlated to other asset classes. That supports investor confidence. Returns are of course important but they are not always the driving factor, ILS is a genuine diversifier and it’s the non-correlation that people are still attracted to.
“For those thinking about investing in an ILS fund, the one area to be mindful of is matching the liquidity profile because you are investing in something that is connected to an insurance loss. If it’s a typical Cat Bond, you have to wait for an event to occur to see if a return is going to be paid out. In the meantime, if an investor puts in a redemption request they might have to wait, whereas in a more liquid vehicle, that just isn’t the case. It is important that an investor understands the timing of getting their money out, although there is a secondary market.”
In recent years, the ILS space has become more mainstream in institutional allocations as investors have become more comfortable with the asset class. Still, the amount that investors are allocating is relatively small in relation to their total assets, and typically tends to only be 2 to 5 per cent of total allocations made according to Demerling. As trust further builds and as other insurance lines are supported by ILS, however, one might see those allocation levels tick up slightly.
As someone recently said at an industry event hosted by Artemis, collateralised reinsurance works “exactly as designed and advertised”.
“The property catastrophe market has suffered a 1 in 100 years loss event two years in a row and ILS reinsurance was there to pay out in a timely fashion both years,” remarks Demerling. “It’s not just about returns, it’s also about providing protection, and in that sense the ILS market has performed very well and demonstrated its fitness for purpose. It’s been battle-tested and has shown its durability and reliability.”
This is borne out by the overall AUM numbers. The top 10 ILS fund managers in the Artemis Insurance Linked Securities (ILS) Managers & Funds Directory now oversee USD66.8 billion of assets between them and the list as a whole is nearing USD100 billion.
In the first quarter of this year, investor demand has remained buoyant and other jurisdictions have shown interest in the ILS product offering. The Pool Re Cat Bond, which was the first terrorism risk Cat Bond in London issued through a special purpose vehicle called Baltic PCC Ltd, was oversubscribed, raising GBP75 million.
The bond provides retrocession terrorism loss protection in excess of Pool Re Members’ net loss of GBP500 million. In so doing, it brings new sources of capital to the terrorism risk market. GC Securities placed the three-year bond, which provides cover on an annual aggregate basis and carries an initial interest spread of 5.9 per cent per annum. The notes are listed on the Bermuda Stock Exchange.
For those looking to launch a new vehicle in the ILS space, Walkers is able to assist with initial structuring advice.
“If someone is looking to set up their own platform on the insurance side or they are an investor looking to do due diligence on an ILS manager, we are happy to have that initial conversation and advise them on the best structure to meet their needs. When they decide to move forward, we have an affiliate that can incorporate the company, and provide an independent director. We can handle all the regulatory and licensing filings with the BMA on the fund and insurance side, as needed, as well as act as a BSX listing sponsor.
“We are very supportive of the BSX and are always looking to bring more issuances to the exchange. To the extent we know an ILS vehicle is coming through the pipeline, the BMA is happy to sit down and have an initial conversation and flag any potential concerns early on. I think that process works well; it’s a very joined up, collaborative approach.
“There is a sense of optimism that 2019 will be a growth year and that other re/insurance classes are prime candidates for ILS,” concludes Demerling. n
