“Liquidity is king” – cat bond market to benefit: Erik Manning, BMS Re

Right now and for the medium-term, in the world of insurance-linked securities (ILS), “liquidity is king”, according to Erik Manning, Director at BMS Re in Bermuda, who believes ILS managers need to focus on finding more liquid ILS investment structures to offer to their clients.

Speaking with Artemis around the Monte Carlo Rendez-Vous de Septembre reinsurance industry event, Manning explained that cost-of-capital is all-important and while the ILS market opportunity for investors is especially good at this time, ILS managers should remain cognisant of the challenges posed by global volatility and the high costs of financing in capital markets.

Across reinsurance in general, capacity is still an issue, Manning said.

“On the property cat side we continue to see a general reduction in market-capacity, although as is typical this reduction has not been evenly distributed across the market, being more pronounced in some segments much more than others.

“The high cost of financing and credit (relative to the past 10 years at least) is in fact one of the bigger drivers of that capacity pull-back and indications are that interest rates may stay elevated for some time,” Manning explained to us.

He also highlighted the volatility faced globally that is also impacting markets worldwide.

“Adding to the challenges of the financing environment, the industry’s adaptability will be challenged by persistent volatility stemming from geopolitical tensions like the war in Ukraine, as well as natural disasters such as the Hawaii wildfires, Atlantic hurricanes, and torrential California rains,” he continued.

He went on to lay-out what this backdrop means for ILS managers.

Manning said, “This indicates two things to me that ILS managers need to consider. First, in many market segments there is an excellent market opportunity open to investors willing to enter or remain in the market, and that opportunity will probably persist to one extent or other into the medium-term.

“Secondly, in order to lower investors’ and therefore managers’, cost-of-capital in the current interest rate environment, managers need to focus attention on finding more liquid investment structures through which to offer their product.”

Adding, “I expect that this will become a theme in the ILS market in the next 12 to 24 months.”

Liquidity is a hot topic right now, with investors craving more of it in many asset classes around the capital markets.

The catastrophe bond market has been a particularly good example of a rare alternative asset with generally good liquidity when investors really need it, as has been evidenced during periods of financial market turbulence, such as during the financial crisis, or during the pandemic.

Manning said that his employer, reinsurance broker BMS Re has been working to help ILS managers with liquidity issues as well.

“Related to liquidity, Artemis recently reported on the opportunity cost of trapped ILS capital. At BMS we’re working with the markets to restructure trapped capital to provide meaningful liquidity to investors while protecting the interests of cedants,” he explained.

That’s one area where the private nature of ILS assets sourced via collateralized reinsurance and retrocession arrangements can lack liquidity and Manning notes that the clear winner, when it comes to liquidity, is the catastrophe bond.

“Given that I believe “liquidity is king” in ILS for the foreseeable, medium-term, future, I expect the cat bond segment to grow exponentially for the next couple of years,” he told Artemis.

He went on to explain how BMS Re is setting itself up to serve its clients into the future, highlighting the importance of a data-driven approach to client servicing, while managing those all-important relationships.

Manning said, “Over the last 10 years BMS has grown to become a global business, with access to capital and markets across the globe. Through our Capital Advisory businesses in the US, Bermuda and Europe, as well as our coverage of investors in AsiaPac which is run from Hong Kong, BMS covers the world’s key marketplaces for risk capital. This is essential for broking businesses in 2024 and beyond.

“But then there is the more fundamental matter of a culture of close client relationships which allows for best-execution in a data-driven reinsurance environment, having a deep understanding of our clients on an individual basis is something we are proud of at BMS Re. We work closely with cedents to ensure reinsurers have the most accurate and detailed exposure, performance and financial data, not only at renewal, but over the course of the contract period.

“We model, synthesise and analyse our clients’ data at regular intervals so that they are able to make the most educated and informed decisions at renewal, as well as facilitating conversations with reinsurers. Quality of information (data of all sorts, model-driven exposure quantifications, etc.) is the ultimate key to finding clients the most efficient risk capital, and BMS’s culture of client relationships unlocks the provision of that critical data / information.”