Healthy pipeline of ILS deals expected in 2017: LGT ILS Partners

In a recent interview with Artemis, Christian Bruns, Hilary Paul, Pascal Koller, and Michael Stahel, LGT ILS Partners Portfolio Managers, noted an expectation for continued ILS sector growth in the coming months as market dynamics suggest additional interest in the space is likely.

They discussed the key January 1^st 2017 renewals season, the current pricing environment, and also explored the continued rise of the collateralised reinsurance sub-sector and what this might mean for the catastrophe bond space in 2017.

With more than 60% of reinsurance programmes renewing on January 1^st, 2017, could you discuss any trends you witnessed during the recent, key renewals?

Our initial analysis indicates stable to slightly lower renewal rates, with a decrease of 5% to 10% for US placements, stable rates for European transactions and even some rate increases for loss-affected programs (especially in Europe, after the Summer floods and hail storms, as well as Australia). Rate reductions also varied considerably by coverage type: larger rate reductions were seen on liquid and easily tradable industry loss warranties (ILW) and some larger, repeat retrocession placements while rates for traditional reinsurance coverage and corporate business (insurance for large corporates) once again remained firmer.

With pricing in the global reinsurance and ILS space being under pressure for some time now, could you provide some thoughts on the main drivers behind this?

The key drivers of the continued price pressure are the absence of extreme insurance events, the continued consolidation of reinsurance programs and the resulting strengthening of balance sheets of insurers and reinsurers (centralization of purchase of reinsurance which typically leads to a more efficient use of capital and lower demand for reinsurance protection) and lastly the continued inflow of third-party capital into the asset class which lead to an increased competition among reinsurance capacity providers. However, with the implementation of the new Solvency II regulations in Europe which are adding a higher value to collateralized protection vis-a-vis traditional reinsurance for the lack of credit risk, we are experiencing an increased demand for such fully collateralized protection. This has helped to stabilize the premium softening.

Another important driver was once again the emphasis on sourcing/networking: seasoned ILS managers such as LGT can draw on a decade of experience in deal sourcing and an excellent network of long-standing trading relationships with insurers and reinsurers. This franchise puts us in a considerably advantageous position against traditional reinsurers and newer ILS players.

Throughout 2016 ILS market observers and analysts noted that growth in the collateralised reinsurance market continued to outpace catastrophe bond growth, do you expect this trend to continue in 2017?

As the structuring costs for ILS/cat bonds are considerable and such securitizations require a significant amount of management attention (and time) within an organization, we continue to see especially insurers to favour CRI transactions over cat bond placements. However, we still expect repeat sponsors to renew their expiring cat bond placements and specially the most recent Galilei cat bond transactions showed that the capital market is able to absorb very large multi-year transactions – clearly an advantage over the CRI market. We are therefore hopeful that this will spur additional interest in the ILS market and we expect a healthy ILS deal pipeline into 2017. Therefore, whilst our key focus remains on the CRI allocation, we still expect a small absolute growth of the cat bond market in 2017.

Read previous Artemis interviews here.