ILS demonstrates resilience, reinsurance capital grows at 1/1: Guy Carpenter

The insurance-linked securities (ILS) market and in particular catastrophe bonds demonstrated their resiliency around the key 1/1 January reinsurance renewals, with significant capital attracted to new cat bond issues, Guy Carpenter has said.

The global reinsurance market ended the year with some US $397 billion of traditional capital, which is slightly up on year-end 2019, reinsurance broker Guy Carpenter has estimated.

Helping here were favourable valuations of assets and capital raising initiatives, as well as the new start-up reinsurance capital that came to market in time for the January 2021 renewal season.

As a result, capital was abundant enough to satisfy most demand, as we’ve already documented in our reinsurance renewals coverage.

At this stage it’s less certain how overall ILS capital sits compared to the end of 2019, but our gut feeling is that it could also be slightly higher at this stage, given capital raises at some ILS fund managers, launch of new collateralized vehicles and the postponement of certain issues related to COVID.

“While there is no doubt that in 2020 the reinsurance market was impacted on multiple fronts by property losses, COVID-19 and continuing strain in the casualty market,” explained Lara Mowery, Global Head of Distribution at Guy Carpenter.

Adding, “It is a credit to the financial robustness of our marketplace that reinsurers were largely able to navigate through these challenges, respond to changing conditions and define market strategies for management and investors.”

The resilience was not only seen in the traditional reinsurance market though, as “resilience was also evident in the insurance-linked securities arena,” Guy Carpenter said today.

Once again, the ILS market demonstrated its attraction to investors in the low correlated returns on offer to them from reinsurance linked returns.

The catastrophe bond market “continued to attract significant capital” the broker explained, while in other areas of ILS syndicated sidecar deals and collateralized reinsurance strategies also experienced limited new inflows of capital, Guy Carpenter explained.

However, it was a more challenging renewal for some, as complications over COVID losses and catastrophe exposure meant that there was some uncertainty regarding the level of capital available for new and renewing placements, as the January renewal approached.

But overall the ILS market and its cedents overcame this, albeit partly by postponing certain negotiations.

As we explained yesterday, certain issues related to the potential for insurance-linked securities (ILS) collateral to be trapped, because of uncertainty over the COVID-19 pandemic and its potential losses for the insurance and reinsurance industry, were largely postponed until after the January renewals.

We’re told that decision has been a significant help to cedents in filling certain areas of reinsurance towers and getting the continuity of coverage they sought.

But it is going to make for some interesting weeks ahead, as these discussions are concluded.

But it was the catastrophe bond market that was the real star of the end of year renewal season, supporting increased capacity for cedents at efficient rates.

We’ve detailed the record 2020 catastrophe bond year in our new report, which you can download here.

“New issuances in the catastrophe bond market have been very buoyant in the fourth quarter,” said David Priebe, Chairman of Guy Carpenter, “bringing full-year issuance to USD 10.8 billion, a new record for annual property and casualty catastrophe bond activity. Most fourth quarter issuance was well supported, which enabled many buyers to secure the top end of their size targets (or beyond) at the lower end of price guidance.”

As we explained yesterday, it looks as if third-party and collateralized sources of reinsurance and retrocession capacity have played a key role again at the January renewal season, with capital markets sources of funding growing across the marketplace.

Read all of our reinsurance renewals coverage here.