Elementum in phenomenal shape, excited about future opportunities: John DeCaro

After a successful 2023 and continued, strong interest in its strategies, insurance-linked securities (ILS) investment fund manager, Elementum Advisors, LLC, is optimistic on the growth of the market and the environment in 2024.

This is according to Founding Partner, John DeCaro, who recently spoke with Artemis about the outlook for the company and the broader ILS space amid strong interest from both new and existing investors.

Currently, Elementum’s ILS AUM sits at around $4 billion following a “very successful and spectacular” 2023.

“That was a function of basically a combination of new inflows, new products and performance resulting from the lack of any meaningful catastrophes,” said DeCaro. “All in all, the firm is in phenomenal shape and we’re very excited about the opportunity set in 2024 going forward.”

DeCaro explained that the firm is seeing strong interest in ILS strategies, which has been bifurcated between less illiquid catastrophe bonds and more risk forward collateralized reinsurance positions.

“We’re looking to continue to deploy capital in those segments of the market this year. And, while we can’t talk specifically about any funds or mandates, in general, we are looking to deploy capital in more of the capacity constrained US reinsurance markets, which would tend to have a lower attachment point risk profile. Also, we continue to see opportunities in the cat bond market, particularly with an emphasis on peak perils,” said DeCaro.

Regarding investor sentiment, DeCaro told Artemis that there’s a clear preference towards cat bonds because of both the liquidity and the returns that have been generated, with cat bonds cumulatively outperforming the Eurekahedge ILS Advisors Index by a meaningful amount during the 2017-2023 period of heavy cat exposure.

“So, I think that performance as well as the fact that there have been issues associated with trapped capital and sidepockets has shifted investor sentiment towards something that is more liquid.

“However, it does appear that there’s an increasing amount of interest that’s slowly occurring on the collateralized reinsurance side, based on the performance of a number of reinsurance strategies in 2023,” said DeCaro.

At the same time, the industry has started to get a handle on issues such as trapped capital, sidepockets, et cetera.

“So, you would anticipate that as pricings starts to tighten on the bond side, if it were to remain more firm on the reinsurance side that could lead to a shift in investor sentiment over towards collateralized reinsurance. But we wouldn’t think that that would necessarily play out until maybe the second half of 24 and potentially into 25 or 26,” he continued.

In recent months, cat bond spreads have tightened, but according to DeCaro, we’re still looking at a market spread that’s probably in the top quartile historically.

“The rally that we’ve seen in January and February has brought spreads back into the mid seven hundreds level. But we think that that is somewhat artificially influenced by having maturities in January and the need for investors to basically put capital to work prior to the peak period of new issuance, which has begun in earnest earlier and in February,” he explained.

Artemis’ data shows that it’s on track to be a record Q1 for the cat bond market, with issuance exceeding $4 billion for just the second time, and from discussions Elementum’s had, DeCaro wouldn’t be surprised if annual 2024 issuance was in the $15 billion to $20 billion range.

“The question is going to be will there be sufficient capital coming into the market to absorb all the supply that sponsors will want to bring to market. We see that there’s starting to be investor interest that is effectively chasing return. But the question becomes, how quickly will investors be able to complete their due diligence and education on the asset class and get that through an investment committee or approved internally before the first half of the year?” said DeCaro.

“It was an interesting dynamic because a lot of investors have said we want to see what 2023 looks like, and we want to get a year of solid performance behind us before we can start to really commit to the asset class.

“So, I think we’re optimistic in terms of the inflows that we’re seeing and the inquiries that we’re seeing. But the question remains, how much capital will come into the space from new investors versus top ups from existing?” he said.

As existing investors examine their ILS allocations and new investors mull entering the space, DeCaro highlighted the forecast for the upcoming storm season.

“We are mindful of the forecasts but would reiterate for the benefit of all investors that activity in the basin may not translate necessarily into high incidence of severe hurricane landfalls in populated areas where there’s high levels of insured value.

“It’s important to be mindful of the seasonal forecasts, but there are a number of examples where there has been a lot of activity in the basin with limited impact on the cat bond and reinsurance markets. And conversely, there have been years with low levels of activity that have had the one meaningful hurricane that has caused significant losses, like 1992 with Hurricane Andrew.

“So, obviously, it behoves every manager within the sector to be mindful of what the upcoming meteorological forecasts look like, but we continue to believe we’re being paid appropriately for the risk that we’re taking even in an active season,” he said.

To end, DeCaro reiterated Elementum’s optimism on the growth of the market and the market environment in 2024.

“I think one of the sea changes that we’ve seen that will support that, is the fact that there literally is a very broad level of interest in issuing product across the universe of potential issuers, and that’s very beneficial,” said DeCaro.

Read all of our interviews with ILS market and reinsurance sector professionals here.