ILS investors

ILS investors, the buyers of insurance-linked securities, are the players who supply so-called alternative capital to cat bonds and collateralized reinsurance. August and September 2017: Harvey, Irma, Maria. Then the California wildfires, then Typhoon Jebi in 2018. In two seasons these investors learned what loss creep costs, those claim estimates that rise quarter after quarter. They also learned what trapped collateral means: cash locked in accounts that cannot be released until the claims close. Some pension funds cut their allocations. Four years later, after Ian in 2022, reinsurance hardened, spreads widened, and cat bond issuance set records in 2023 and again in 2024. Same investor base, different point in the cycle. Here is how it breaks down. Specialist managers hold the largest share and invest for clients who have no modeling team of their own. Pension funds go direct or through mandates and can live with long lock-ups. UCITS (Undertakings for Collective Investment in Transferable Securities) funds offer daily or weekly liquidity. So they can only hold tradable cat bonds and never private collateralized reinsurance. Reinsurers, for their part, run sidecars and third-party funds. All of them buy the same proposition: a spread paid on top of collateral held in short-term government paper. That is why total returns jumped when rates rose in 2022. Low correlation holds against equities. Among the investors themselves it does not: a major Florida hurricane hits nearly every portfolio at once. That is what moves the price of capital from one season to the next.