Speaking with Artemis at the Monte Carlo Rendez-vous event, Jarad Madea, Chief Executive Officer, Howden Capital Markets & Advisory explained that the insurance-linked securities (ILS) asset class is “still in a good spot” with attractive returns possible and a clear evolution in the market’s discipline.Leading Howden Group’s activities in capital markets structuring, placement, investment banking and ILS, Madea told us that with improved structures and a disciplined investor base, insurance and reinsurance continues to demonstrate its ability to attract capital from institutional capital markets, while his goal is to continue expanding the Howden Capital Markets & Advisory (HCMA) footprint worldwide.We began our interview in Monte Carlo by talking about the market and what Madea was hearing from around the RVS event.“There’s a lot of talk about where does pricing go? Is it down 5%, is it 10% or whatever.

But I think that the key point from the investor perspective is that, no matter what it’s going to be down within that range, I think it’s still a very good period for capital providers to make attractive returns,” he explained.Continuing, “That’s across the ILS spectrum, whether its cat bonds, whether sidecars, or with traditional reinsurers, I think we’re still in a good spot where attractive returns can be made.“The other big part of the conversation,is what happens in a softening market? Whether it’s M&A or other, I think there’s some conversations around that, just given some less organic growth and build up of excess capital “But I think that the key is and the sense I get from the investors is still, there is interest to deploy capital into this market while it’s still reasonably attractive.” Madea moved on to explain that in the recent very active period for catastrophe bonds and insurance-linked securities (ILS) a key focus for the HCMA team has been on originating new sponsors to the market.

Madea told us, “We’ve been very active.I think the interesting thing is you see the number of new sponsors.We’ve spent a lot of time with them, bringing them into the traditional programmes.

I think we’re going to see even more new sponsors globally, some that haven’t done it before.“We’ve been engaged with a little more interesting first time sponsors.I mean, the last couple of years, we’ve done a lot of first time sponsors, first time sponsors in the Florida market, but I think we will see some more global first time sponsors and that’s interesting and good for the investor base.” On the subject of discipline and how the ILS market has matured and adapted to challenges faced a few years ago, Madea is positive and sees the progress made as putting the market on a strong-footing.

“I think there’s good discipline around the market and those investors, because we now have a track record of what happens in hardening markets, what happens in softening markets, and there’s good discipline around some of the end-investors this time, whether it’s going through ILS managers, or if it’s some of those investors doing direct deals,” he explained.Going on to say that, “They’ve now seen 10, 20 years of the market and participated, they can see what happens when you let it get too soft.I think there’s just a much better discipline, which is helpful for the market.

“There’s just better structures today, in terms of cat bonds, but also sidecars.Financial investors came in in sidecars in the last three years.Why? Because the market looked good for that year.

Pricing looked good, but they don’t know what the market’s going look like in two years, three years.They want to play the market today and before, when you had those classes, there wasn’t as much of that disciplined structuring around sidecars, it just wasn’t as prevalent.Madea further stated that, “Sidecars have been very helpful to allow investors to come in a more structured way, short duration way.

“I think that’s helpful for the overall market, because in the property market you need capital at the right time.So they can come in, but they don’t come in in a permanent way and then next year, everybody re-evaluates.“It tightens the spread of what the pricing may be, which I think is healthy for the market.

I’ll come back to discipline, investors are a little more disciplined now and understand it more which allows as more efficient market without as big of movements.” We also discussed the trend that has seen certain types of investors looking for potentially more efficient ways to bring new capital into reinsurance, which has in part helped to fuel recent sidecar market growth.Asked why investors are looking at structures like sidecars instead of standing up new start-up reinsurance firms, Madea said, “It takes out a lot of the risk of the new company, management team risk, pricing cycle risk in the future, operational risk, somewhat takes that out and simplifies.The other thing they do struggle on, is what is the exit of traditional balance sheet.

That’s where a lot of the casualty sidecars and the reason more those are getting done, there’s a more easy way to define the exit in terms of some of the legacy liability players coming in and pre-agreeing commutation terms.It defines the exit, right? I think the defined exit is a really big thing for the investors.” He added, “The industry has innovated in a nice way.Casualty sidecars, we’ve seen the innovation in terms of bringing the legacy players, bringing the investors, the structuring around it, the asset management side .

Innovating to come up with those solutions definitely brings in that capital.” For Madea one of the key aspects in the work the team at HCMA has been doing is in building relationships with a staying close to investors.This helps in understanding what investors really want and what features in a structure of investment are most important to them.“Identifying investor wants and needs, helps us understand how do you match that risk that a cedent has to the capital, which I think has helped us in structuring sidecar deals.

It’s important for us to make sure we know what those investors need, there’s always a little bit nuance, each investor is a bit different.The markets are similar as well,” he explained.“That’s been a core part of our success, of spending time with investors, identifying what they need and innovating around that to find them the risk in the form they want.” On the cedent side it’s also about building close relationships, alongsdie innovating to provide them with the most efficient access to risk and funding capital.

Madea said, “We recommend diversification for any of our cedents and that’s in terms of different types of capital, whether traditional reinsurance or cat bonds, or other structures.“We tell them to keep their traditional partners as well, because it’s important.Same with sidecars.” Finally, we discussed the growth in activity undertaken by the HCMA team, across ILS and reinsurance capital markets.

Madea told us, “Our ILS side has just grown so much in particular, and there’s a lot of reasons for that, the team itself and being a part of Howden over the last two and a half years, I think has been very helpful for our ILS team.” Telling us during our interview at the RVS what his three priorities are for HCMA over the coming few years, Madea highlighted worldwide ambitions.“Global expansion is one.We’ve done a great job in the US, expanded a lot in Europe the last two years, and I think that’ll be a big area for us and right now to further expand our clients and bring more cedents in Europe and other international regions, outside of the US, into the cat bond market.

“Casualty sidecars is two, it’s a big priority for us, there’s a lot of investor interest, a lot of cedent interest, we expect to see more activity.It’s a big priority for us.“And three, I think is further building broader investor relationships with folks that are evaluating the space, understanding their needs and innovating to keep them interested and involved as the market evolves,” Madea said.

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