Turn in the market “will be great for cat bond issuers” – David Flandro

When the global reinsurance market begins to turn from its softening cycle, issuers of catastrophe bonds will benefit from an increased demand for cover, according to JLT Re’s David Flandro.

The global reinsurance marketplace remains in its softening phase, a trend that is expected to continue into 2017 as competition, an oversupply of capital and other headwinds remain.

At some point the market will start to turn and move away from its softening phase, and while no one can be sure when this will happen or what might cause the turn in the market, a hardening of the market could be good news for the catastrophe bond and insurance-linked securities (ILS) space, according to David Flandro, Global Head of Analytics at reinsurance broker JLT Re speaking at a media briefing during the 2016 Monte Carlo Rendez-vous.

“When we have a turn, that will be great for the cat bond guys, because there will be a big demand for cover, especially if we have a big catastrophe. Remember, cat bonds used to have a 12% yield with a 3% expected loss, now there’s a 5%-6% yield with a 3% expected loss.”

“If the market changes, that will again change, and you’ll see a lot more cat bond issuance, particularly private placements, I think, because they are easier to issue. And you’ll see a lot of collateralised cover coming into the market to write cat,” said Flandro, speaking at the meeting of the reinsurance industry in Monte Carlo this week.

As highlighted by the Artemis Deal Directory, catastrophe bond issuance has declined in recent quarters when compared with the record-breaking levels of issuance seen in 2014. But despite this, collateralised reinsurance placements, private, or cat bond lite structures, and other forms of ILS, such as sidecars, have increased in more recent times.

If more catastrophe bond issuance will be seen after any sort of market turn, the same will be true for collateralised reinsurance and other ILS products, as the market has now expanded sufficiently that all forms of alternative capital are likely to expand.

JLT Capital Markets has facilitated a number of catastrophe bonds over the years, including the Market Re Ltd. (Series 2016-5) deal that closed recently, a ground-breaking temperature-linked weather transaction.

Constant dialogue surrounding the ILS space, which is driven by the fact that it does still remain largely untested in the face of a large catastrophe event, discusses how it might react after the next large loss.

And Edward Hochberg, Chief Executive Officer (CEO) of JLT Re North America, also discussed this at the JLT Re press briefing at Monte Carlo, agreeing that it’s likely ILS investors will remain and reload in the space after a large loss.

“And they’ve already got their heads around having an exposure to this sector, that’s the hard part,” said Hochberg.

More and more industry executives and observers seem confident that following a large event, third-party reinsurance capital providers will remain and redeploy in the space.

It’s unclear what will turn the market and is widely viewed that a large single event won’t be enough in the current market landscape, and it could take a confluence of factors to drive a turn in the sector.

But according to industry experts it seems cat bond and ILS players will continue to participate in the catastrophe reinsurance space, benefitting from uncorrelated albeit compressed returns, in the current environment, and will likely benefit from better pricing following an event, leading to an increase in demand for cover.

Read all of Artemis’ Monte Carlo Rendez-vous coverage here.