Bumper cat bond issuance meant reinsurance demand flat: RenRe CEO

An unprecedented volume of catastrophe bond issuance in the first-half of 2017 resulted in flat demand for traditional reinsurance capital at the mid-year renewals, ultimately fuelling additional reinsurance market pressure, according to President and Chief Executive Officer (CEO) of RenaissanceRe (RenRe), Kevin O’Donnell.

Speaking during the Bermuda domiciled reinsurer’s second-quarter 2017 earnings release, O’Donnell discussed the competitive and challenging property reinsurance market at the mid-year renewals.

Demand for traditional reinsurance during the period was relatively flat, which, increased competition in the space, and O’Donnell attributes this to the record-breaking levels of catastrophe bond issuance witnessed so far in 2017 as well as the low pricing witnessed for these ILS transactions.

O’Donnell commented; “One factor behind this lack of increased demand for traditional reinsurance was the pricing witnessed within the catastrophe bond market.”

As shown by the Artemis Deal Directory and the Artemis Q2 2017 insurance-linked securities (ILS) and catastrophe bond market report, cat bond issuance so far in 2017 has exceeded $10 billion, the highest ever seen in a single year after the roughly $9 billion of issuance seen in 2014.

“To put this into perspective, there was less than $6 billion of issuance for the whole of 2016. I’m not sure how much this added to the pressure at this renewal, but it did not help,” said O’Donnell.

It’s worth noting that according to Artemis data, cat bond issuance in 2016 was just above $7 billion, so different from the number quoted by O’Donnell (Artemis numbers can be higher owing to the inclusion of private deals and cat bond lite deals), but either figure shows how in just six months the volume of issuance has accelerated greatly year-on-year.

So as cat bond issuance increased dramatically helped by the lower pricing witnessed, as seen so far this year, the demand for traditional reinsurance has not grown as greater coverage has been purchased from the capital markets.

Analysts at Keefe, Bruyette & Woods (KBW) commented on O’Donnell’s statement, underlining relatively flat demand, attributable to a very active cat bond market, leading to overall rate declines of around 5%.

The reinsurance sector, and in particular the property catastrophe space, remains extremely competitive as both traditional and alternative sources compete over market share.

Interestingly, O’Donnell said that RenaissanceRe’s “greatest growth is likely behind us for the foreseeable future” given the market conditions seen at recent renewals.

“The best underwriter does not write unprofitable business full stop,” O’Donnell said.

Interestingly though, RenRe elected not to renew its Mona Lisa Re Ltd. catastrophe bond, despite the lower pricing and high demand seen from ILS investors. This cat bond was protection the more remote end of RenRe’s exposure, and while the reinsurer bought a little more traditional coverage at the middle of its exposure distribution the cat bond was not deemed a worthwhile renewal it seems.

Of course RenRe does have its Fibonacci Re sidecar-like vehicle, which can also issue notes in cat bond form to investors, so it’s possible that the reinsurer would rather use this vehicle now than pay for a publicly marketed cat bond issuance.

Slowed demand for traditional reinsurance will increase competition in an already pressured market, as traditional capacity looks for a home, so it will be interesting to see how strong cat bond issuance is in the second-half of 2017 and whether it continues to impact traditional reinsurance demand, by taking more share.