The overall performance of insurance-linked securities (ILS) funds has slipped despite another year of record cat bond issuance, according to a Best’s Special Report.

AM Best said that the global ILS market also remained saddled with prior catastrophe losses and a decline in assets under management for some prominent ILS funds.

According to Trading Risk, AM Best said, the top-tier ILS managers lost more than $2 billion, approximately six per cent of their AUM, in the second half of 2021, because of catastrophe activities and redemptions.

In response, it said, ILS fund managers were re-underwriting and de-risking their portfolios, because rate increases were no longer a panacea for improving underwriting results and satisfying skittish investors.

AM Best said issues that were especially relevant for the reinsurance and ILS markets in 2021 included:

• Catastrophe losses in 2021 were the highest since the record high in 2017, with notable events including Hurricane Ida, Winter Storm Uri, the Bernd floods in Europe, and the December tornado outbreak in the US.

• Losses associated with secondary perils continue to receive increased attention from reinsurers and ILS managers due to their magnitude.

• Covid-19-related claims reserve trends are levelling off and stabilising.

• Increased catastrophe loss experience is driving the market to improve underwriting, tighten coverage language and seek rate increases.

• The retro market remains challenged by capital constraints.

• The poor performance of some ILS sectors contrasts with the positive performance of cat bonds.

The agency said ILS investors were adjusting their strategies.

The report said: “The ILS market remains attractive to investors due to its low correlation with the broader capital markets, providing a valuable source of diversification. However, investors are understandably fatigued by the poor performance of some ILS sectors.

“For example, the Pennsylvania School Employees Retirement System plans to divest its ILS holdings, estimated at around $835.2 million as of June 30, 2021, as part of a broad reallocation of its portfolio to public equities.

“In addition, the Arkansas Teachers Retirement System reduced its allocations in (Bermudian-based) Nephila Capital Management ILS Fund and wound down investments in an Aeolus Capital management fund last year.

“The Dutch pension fund manager, PGGM, reportedly withdrew its mandate from an ILS fund in the second half of 2021 but increased its mandate with a few other ILS fund managers in the first quarter of 2021.

“Time will tell if investor fatigue is going to affect the overall ILS market.”

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Insurance-Linked Securities -- Market Review -- March 14, 2022.pdf