In a recent interview Artemis discussed the outlook for the insurance-linked securities (ILS), catastrophe bond, and the traditional reinsurance marketplace in 2017 with Gary Martucci, Director, Standard & Poor’s Global Insurance Ratings.
Martucci discussed the potential for ILS and catastrophe bonds to expand into new peril regions over the coming months, and also the opportunity for the ILS space to play a greater role in providing reinsurance for corporations, a trend that slowed somewhat in 2016.
The continued influence the softened reinsurance landscape is having on the ILS space can’t be ignored, and Taoufik Gharib of S&P was eager to discuss the broader reinsurance marketplace as well, suggesting that merger and acquisition (M&A) activity could well be back in 2017.
On the prospects and opportunities for the catastrophe bond space and the broader capital markets in 2017, Martucci said:
While cat bonds are a tried and tested form of risk transfer, the covered risks are relatively limited, with the primary focus being U.S. hurricane. This year should see movement in a more meaningful way into “new” perils and regions. Clearly, ILS can fill the protection gap for areas that are prone to nat-cats but have minimal insured values. While there have been a couple of cat bonds (e.g. MultiCat Mexico 2012 and CCRIF 2014) issued, there are tremendous opportunities for investors, and protection seekers.
Risk modeling firms have models that can provide guidance in the risk transfer process and any issuance would likely be based on a parametric trigger. ILS has always been viewed as a diversifying asset class and expanding investment opportunities to worldwide perils is an obvious means to diversify the ever-increasing investor bases risk exposure.
Another opportunity is for the capital markets to provide reinsurance for corporations and municipal entities. There have been a handful of cat bonds including Drewcat Re in 2006, MetroCat Re in 2013 and PennUnion Re in 2015 sponsored on behalf of Dominion Resources, the Metropolitan Transportation Authority and Amtrak respectively, which have done just that, each on a parametric basis.
Given the amount of capital available in this asset class and attractive pricing, corporations and municipal entities could acquire reinsurance coverage in the capital markets.
Looking to the broader reinsurance industry landscape:
Artemis also spoke with Taoufik Gharib, a Senior Director at S&P, for an outlook on the reinsurance market more generally.
Pricing as well as terms and conditions will remain on top of the agenda in 2017. In the January 2017 renewal season, many reinsurers renew more than half of their annual treaty business. The degree of reinsurance rate reductions (0% to -5%) has been slowing down in 2016, but pricing stability remains somewhat elusive with a hope of some stabilization heading into the New Year.
With abundant reinsurance capacity supported by traditional and alternative capital, relatively benign natural catastrophe losses in 2016 and expected strong earnings in the fourth quarter and full year 2016 (though lower than in 2015), the expectations of a significant turnaround in pricing in 2017 are dampening.
Finally, for the reinsurers, it looks like M&A activity is back. Following a wave of transactions in 2015, M&A activity slowed in the first half of 2016 before gaining momentum again in the third and fourth quarters of 2016. On the back of this, it seems that M&A activity may be back in full swing and is likely to continue into 2017, as organic growth remains hard to achieve because of copious reinsurance capacity and shrinking margins.
We believe consolidation could be a solution for reinsurers looking to strengthen their competitive positions, lessen concentrations, and bolster balance sheets. As expense reductions become increasingly important in the soft cycle, M&A expected cost synergies may become more attractive. However, the industry M&A track record has not been stellar. Many of these deals have not resulted in stronger companies, increased shareholders’ value, and ultimately higher credit ratings.
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