Pricing and activity in the industry loss warranty (ILW) market has seen some improvement in recent weeks, with more buyers coming forward to take advantage of additional protection at good pricing, helping some insurance linked investors to benefit.
Once such investor is the insurance-linked securities (ILS) team at Credit Suisse Asset Management. The CSAM ILS team cited the first signs of an improvement in ILW pricing in June, as buyers looked to fill gaps in their programmes with covers structured on an industry loss basis.
It’s interesting that CSAM cites ‘improved pricing’ of ILW’s at a time when most other catastrophe exposed contracts, bonds or renewals were being cited as declining in price even further. ILW prices did drop very rapidly earlier this year, perhaps as a result of both the market softening effects but also as the instruments were seeing much less usage, compared to a year earlier, so pricing on ILW’s may have dropped more than other structures and hence they have bounced back a little first.
On a comparable risk basis, CSAM clearly found ILW pricing more attractive than some other opportunities on offer in June. Other market participants agreed, saying that there were some choice ILW transactions available to invest in which on a risk adjusted basis were better priced than they had seen in recent months.
Reinsurance broker Willis Re also noticed the resurgence of ILW’s during June and for the July renewals, saying that ample capacity and attractive pricing as the hurricane season approached helped the ILW market to see a greater number of completed trades than had been seen of late.
Market participants say that there have been some scattered ILW opportunities through July and even into August, as some cedents look to close holes in their reinsurance programmes, in some cases holes which were left by an inability to place layers at the renewals. This could be due to having overly aggressive price targets at renewal, meaning that some layers of programmes failed to be secured.
During the month of June the Credit Suisse Asset Management ILS team said that it added some additional exposure from the U.S., Japan and Europe to its portfolios on an ILW basis. The CSAM team had sold some catastrophe bond positions during the month and perhaps found these ILW transactions to be well priced as a replacement.
The Credit Suisse Asset Management ILS team said that it expected ILW pricing to continue to improve through the months following June, something that other market participants certainly suggest to have been the case. As a result of any further ILW pricing improvement, CSAM said that it would look to selectively invest in opportunities both inside and outside of the U.S., over the course of the summer months.
The ILW market has been a bit hit and miss over the last year, but perhaps the descent to new pricing lows, along with the flexibility that ILW’s can offer as a top-up cover to cedents reinsurance towers, is making them more attractive again. There may also be an element of certain cedents who pushed too hard at renewal time having to turn to the ILW market to ensure they have the protection they require in place for the peak of the hurricane season.
The ILW tends to be a reinsurance instrument that comes in and out of favour as the market moves and adapts to broader trends and the availability of alternatives. It will be interesting to see whether ILW’s can perhaps maintain some of the momentum that has been building in recent weeks, resulting in greater activity as we move towards the January 1 reinsurance renewals.