A remarkable year for ILS, navigating capital inflows and outflows – Aon’s Schultz

“It’s been a remarkable year in ILS in a lot of ways, issuance records, of course, but we’ve also navigated some volatility around capital inflows and outflows, and competitiveness between the traditional and ILS markets,” Schultz tells GR.

Last year was a record year for ILS, followed by strong catastrophe bond issuance in the first half of 2024 that broke further records. There was more than $12.3bn of primary issuance across 49 catastrophe bond transactions in the opening six months of 2024, while the secondary market experienced record high trading volumes, observed reinsurer Swiss Re in an ILS Market Insights report.

“While it appears that it’s been a year in which we’ve continued to build volume and set new records, we’ve accomplished a lot in managing some of the volatility as the market gets larger,” Schultz explains.

“Some allocators pulled capital from the market to realise the profits they’ve had over the past 18 months, and that cycling of capital in and out has been a source of uncertainty,” he continues. “All you might see is the headline of record issuance, but the market has also done a good job in managing that source of volatility to the point where it’s not obvious.”

For capital entering the sector, ILS has offered an efficient option, notably playing a dampening role among any expectations that there might have been a ‘class of 2023’ of new-forming traditional property cat reinsurers.

ILS is very efficient and it’s also flexible,” Schultz says. “When there’s additional capacity or capital needs, you can grow your ILS portfolio; when the market starts to get a bit over collateralized, you can shrink some of the capacity that you have in the system someplace. It becomes a very efficient tool for reinsurers and insurers, both, to be able to manage capital more dynamically, by having not necessarily all capital come into a regulated entity.”

He also points to a reversal in the sidecar market, which has begun to grow again, with traditional reinsurance underwriters reuniting with third party capital for these well-tested vehicles.

“We’re starting to see more investors start to participate in side cars again, which is healthy,” he says. “Property continues to be the foundation, but we’ve also seen a couple of casualty sidecar deals, and we’re likely to see more casualty transactions, whether that’s in sidecars, or more conventional ILS form.”

The past year’s record ILS volumes include a trend towards traditional catastrophe bonds, away from the private transactions of collateralised reinsurance markets. Schultz says this emerging preference among managers and allocators began to form two years ago.

“Cat bonds are offering a compelling investment, in risk and return terms, and the market has gravitated there to some extent,” he says. “I would also put ILWs [industry loss warranties] in a comparable light, whereas collateralised re has been the flat component within overall ILS growth.”

Schultz is upbeat about the ILS market’s prospects, having reached such highs during the typically quieter first half to the year, with all eyes now turning towards the Atlantic Hurricane Season to find out what the weather Gods have in store for the market between now and December.

“Everyone’s excited at the prospect of another strong year,” he says. “If we have an event, of course, we’ll learn from it, but if we have another light cat year, that will be two strong years for investors, and that creates more capacity, it brings more investors, which brings more capital into this space.”

Cyber trio

The final quarter of last year saw three cyber ILS issues. In November, Axis ILS closed the first ever cyber cat bond, with its $75m Long Walk 144A issuance. Two further bonds quickly followed before the turn of the year. Chubb launched a $100m East Lane 144A cyber transaction, and Beazley issued its debut 144A cyber cat bond, with a $140m PoleStar Re deal, since scaled up to $300m with a further $160m PoleStar issuance in May.

“I’ve been a strong proponent of cyber coming into the ILS market for a while. It’s taken time to have that happen. It has happened now, and there are data points to support that,” Schultz says.

Issuers and investors have been “highly supportive” to get such “pioneering trades” done, he says, adding to the data that will serve as a “confidence boost” for more cyber ILS to follow.

“Cyber risks continue to grow, and as the market continues to grow, I think at the margin, it’s going to grow more in an excess of loss than a proportional basis, and so I think that’s going to create more opportunity for ILS to participate in cyber in future,” he adds.