Text on screen: PIMCO
Text on screen: How are insurance markets responding to the elevated natural catastrophe event activity of the last few years?
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Text on screen: Rick Pagnani, Executive Vice President, Head of PIMCO ILS Business
Rick Pagnani: The market is responding rather favorably to the activity the last three to four years. In particular, going back to 2019,
Text on screen: TITLE – Market conditions are improving for ILS investors, BULLETS – Reinsurance rates are moving higher following elevated loss activity
you started to see a secular trend where rates were improving, where the market was saying, "we need more units of premium for the risk,” this is a result of the activity of 2017, ’18, ’19, we had hurricane activity in the US, and also in Japan. And then that on top of 2020, where we had unprecedented number of events, 30 named storms in the United States. It was really a year of seriality, as opposed to verticality. So, it was really borne mostly by insurance companies, but it also impacted the reinsurance industry. That, in addition to covid.
Now, while these claims are still being battled in courts, and will be for some time, what this served to do is to trap capital within the reinsurance industry. Reinsurers, ILS managers are having to post reserves. Those reserves, if you're an ILS manager and you're not a sponsored ILS manager, you're going to have to buffer those. So that serves to trap capital, draw out capacity. Demand is still high, so the rate environment is quite favorable at this point. In addition to that, we like what we're seeing from a rate and risk standpoint.
Text on screen: TITLE – Market conditions are improving for ILS investors, BULLETS – Reinsurance rates are moving higher following elevated loss activity, Terms and conditions are improving
We're also seeing better terms and conditions on the underlying reinsurance contracts. Those are the contracts between the ILS manager, the reinsurers, and the insurance companies. Those are moving in favor of reinsurers.
That improvement has served to further amplify the rate improvements, and further amplify and improve risk-adjusted returns for reinsurers and ILS managers.
Text on screen: Given that, where does PIMCO see opportunity in ILS markets?
Rick Pagnani: Well, we see markets across the board.
Text on screen: TITLE – Opportunities today – remain selective, BULLETS – Focus on well modeled perils, SUB-BULLETS - Wind, Earthquake, BULLETS - Emphasize geographical and peril diversification
We would focus and recommend people focus on the primary perils, IE wind and quake. We find that they lend themselves to a higher degree of modeling certainty. We would avoid secondary perils such as wildfire, convective storm, hailstorms, et cetera. We also would emphasize the importance of geographic distribution in terms of peril in region.
We think it’s very important for managers to consider a well-balanced portfolio that is resilient to single events, one that can withstand a type of year like 2020 was. Certainly it is challenging, not every manager can do that. But those that can, can capitalize on it, in a very improved market environment.
Text on screen: How can investors take advantage of these opportunities?
Rick Pagnani: This is an elevated rate environment. I think it’s a great time to be getting in.
Split screen with chevron: TEXT ON LEFT – Text on left: ILS provides diversification in a well-balanced portfolio, IMAGE ON RIGHT – PIMCO trade floor
There are all sorts of benefits associated with the asset class. It certainly provides diversification for a diversified, well-balanced portfolio. So, for those who are looking to take less risk in the space, what we would emphasize there is hyperdiversification, and portfolios that are resilient to single events. For those that are looking to take more risk, we would caution them in manager selection.
Text on screen: TITLE – Considerations when selecting an ILS manager, BULLETS – Understand pitfalls in high-risk strategies, Have requisite skills and risk management systems, Ability to leverage the portfolio
You want to make sure that they understand some of the pitfalls associated with these higher-risk strategies. They tend to be closer to the money, and when you're closer to the money, you're closer to the secondary perils.
Those perils, again, being convective storm, wildfire, hail, et cetera. Those are tougher to model, some are unmodeled. So you need to make sure that the underwriters understand those, have the requisite skills and system to handle them from a risk management standpoint. You also want to investigate the operating platform. You want to make sure that they have a sponsor, they have rated paper. With that rated paper, they can avoid the pitfalls of trapped capital. You also want to make sure that they’re able to leverage your portfolio from a reinsurance and financial standpoint. That’s critical in order to take on rest of world risk, which tends to be lower priced, and requires at times to be levered in order to meet the risk/return objectives of the fund.
Look, it’s been an interesting three years. There’s been a lot of lessons learned. I think we are the beneficiary of those lessons, and we created what we consider a better mousetrap,
Images of PIMCO trade floor
and a better platform, and we look forward to answering any questions you might have with regard to ILS.
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