ILW market continued to soften like cat bonds into July renewal: Willis Re

The market for industry-loss warranty (ILW) protection continued to soften into the July renewal, broker Willis Re has explained, which appears to be a continuation of the trend seen pre-June, as these structures followed the catastrophe bond market’s pricing.

More predictable structures have proven incredibly popular among insurance-linked securities (ILS) investors and alternative reinsurance capital providers in 2021.

The named peril, relatively higher-layer, more predictable nature of the 144A catastrophe bond has been the biggest beneficiary of this, with corresponding high levels of issuance seen, as our new cat bond market report explains.

But the industry-loss warrant (ILW) has been another beneficiary of this, as investors have turned more attention to this structure, most often used for retrocessional reinsurance needs.

As we’ve explained through our regular coverage, spread tightening in the catastrophe bond issuance market drove multiples to levels last seen in 2019.

In fact, the multiple-at-market of catastrophe bonds issued through the first-half of 2021 is now very slightly lower than the full-year multiple of 2019.

This has driven much tighter spreads though, as catastrophe bond’s spread above expected loss fell to its lowest since 2018 during first-half issuance.

Following on the heels of the catastrophe bond market, the market for industry-loss warranty (ILW) protection also softened year-on-year, fas capacity turned its attention to ILW’s in the run up to the renewal season.

That trend persisted through the renewals, according to reinsurance broker Willis Re’s report.

Around the June and July renewals, Willis Re said, “Buyers continue to utilize a variety of indexed link products to address their Capital requirements with the Cat bond and ILW markets continuing to soften from what was seen at 1 January, with investor demand high for named peril transactions.”

Willis Re said that retrocession capacity was largely adequate at the renewals, which will have been assisted by the capital market investors appetite for these risks, in ILW and cat bond form.

Certainty, in how structures are going to perform, has become key for investors, resulting in elevated appetite for cat bonds and ILW’s, it seems.

Related to this, Willis Re said, “There has been a continued migration of capacity towards rated balance sheets largely prompted by the uncertainty surrounding the longer tail nature of COVID-19 related claims activity.”

It is partly this uncertainty that is driving collateralized retro to be a little less available and resulting in more capital being interested in the indexed ILW and cat bond products, it seems.

We explained before that collateralized reinsurance has not softened to the same degree as catastrophe bonds and ILW’s.

This remains true. But right now, as the renewal clean up continues, we hear that traditional and collateralized reinsurance is suddenly looking more competitive again and this could have a bearing on the market dynamic over the coming months, as well as what structure protection ultimately gets bought in.

Whether this is down to excess capacity that didn’t get deployed at the renewals, or a realisation among markets that they are leaving risk on the table by not competing as hard on price, isn’t yet clear.

But this could have a bearing on the future renewals and almost certainly on the renewal discussions that begin later this quarter.