Investors Could Reconsider ILS Investments after Hurricane Ian

Fallout from Hurricane Ian may lead insurance-linked securities (ILS) investors to reconsider ILS investments, furthering the demand/supply imbalance in the reinsurance sector, according to Fitch Ratings.

"Reinsurers facing shrinking balance sheets amid rising rates and increasingly volatile catastrophic losses have effectively utilized the insurance-linked securities (ILS) market to manage risks and to pay insured losses," a Fitch statement said. "However, ILS investors not properly compensated for risk or facing elevated losses amid fallout from Hurricane Ian may choose to reinvest capital elsewhere, which would exacerbate the demand/supply imbalance of the reinsurance sector, which is especially acute in the Florida property market."

According to the rating agency, ILS represent about 20 percent—$100 billion—of global reinsurance capacity, with catastrophe bonds making up approximately 30 percent of the ILS market. But the ILS market will experience a significant share of Hurricane Ian insured losses, which Fitch estimated at $35 billion to $55 billion.

Fitch noted that ILS investors are compensated for the possibility of losing principal due to natural catastrophes. Since 2017, which included insured losses from Hurricanes Harvey, Irma, and Maria, 55 individual tranches of catastrophe bonds experienced a full or partial loss of investors' principal. That's compared to 75 total tranches that have seen a principal loss over the entire period since 1990, Fitch said.

Nearly 33 percent of outstanding catastrophe bonds—$10 billion—have some exposure to Florida wind losses, Fitch said, with $2.9 billion in ILS investments exclusively or predominantly exposed to Florida wind losses or the southeast region and Hurricane Ian.