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Cat bonds keep re/insurers well-capitalised for 2021 hurricanes: Fitch


Property and casualty (P&C) insurance firms in the US and global reinsurance firms are well-capitalised for the 2021 Atlantic hurricane season and the high-levels of catastrophe bond issuance seen recently will assist them in absorbing any major loss events that occur.

fitch-ratings-logoThat’s according to rating agency Fitch, who noted that “U.S. property/casualty (re)insurers are bracing to absorb large potential catastrophe losses with projections for another above-average hurricane season.”

This year though, the US P&C re/insurance market, as well as the major global reinsurance firms, are “largely well capitalized and positioned to withstand a significant hurricane event in 2021,” Fitch Ratings believes.

An area of greater concern is, as ever, the Florida homeowners insurance market, where capital levels are not all so robust.

Senior Director at Fitch Ratings Brian Schneider said, “Florida homeowners’ writers less favorable capital position creates a strong dependence on global reinsurers and the state sponsored Florida Hurricane Catastrophe Fund for underwriting capacity and protection against severe hurricane events.”

That has put the market under more pressure in Florida, which makes reinsurance capital as important as ever, in order for the P&C insurance market to ensure it is prepared.

Our sources have told us that a handful of Florida carriers remain under severe pressure and some have failed to secure as much reinsurance as desired or needed at the June 1st renewal, which we’re told could lead to additional purchases and even some higher-layer catastrophe bonds being launched in the coming weeks, as they try to make surplus.

But, overall, the P&C industry has come out of a year featuring a pandemic and a record level of Atlantic hurricane activity relatively unscathed, with capital levels seen as ample for the vast majority of carriers.

At the same time, the insurance and reinsurance market has become more attractive for investors, which has also helped to boost capital levels in the industry, Fitch believes.

“Recent active hurricane seasons have generated an accumulation of insured losses that have led to substantially higher premiums for coastal property insurance,” explained Director Christopher Grimes.

“Better pricing is attracting additional capital, including a recent influx of hurricane-exposed catastrophe bonds that helps absorb losses and maintain availability of coverage.”

Fitch noted that catastrophe bond investments have been particularly attractive during a period of global volatility during 2020 and that this has now “led to a heightened focus for capital inflows into the ILS market into 2021.”

Demand for catastrophe bonds exposed to US hurricane risk has not waned in the first-half of 2021, Fitch explains.

The rating agency, citing Artemis Deal Directory data, notes that sixteen 144A cat bond issues covering US named storms had been listed by us in the first-half at the time of its report being published.

“The volume of transactions is similar to what came to market in the prior year period, but the average deal size is up considerably with several large-scale renewals completing,” Fitch notes.

The fact numerous cat bonds upsized and priced below guidance during the year so far shows the “continued interest in structured reinsurance risk,” Fitch said.

For investors, the fact the cat bond structure proved its value again in 2020 during the peak pandemic months has served to elevate interest again, the rating agency continued.

“Perceived benefits of catastrophe bonds’ higher liquidity profile and peril-specific coverage relative to other ILS instruments (side cars, collateralized reinsurance) are promoting expanded near-term activity,” Fitch added.

Noting potential challenges investors should be aware of, in some markets in particular such as Florida, Fitch also highlighted that, “Consistent with the traditional market, investors continue to face the risk that loss amplification variables, including social inflation and litigation risk, could exceed initial modeled expectations.”

You can find details on every catastrophe bond to come to market so far in 2021 in our Artemis Deal Directory.

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