Reinsurance broker Willis Re have also published a report looking at the state of the market at the 1st July renewals. In the Willis Re 1st View Renewals Report they suggest that reinsurers are repositioning themselves for a possible market turn after the heavy losses suffered in the past 16 months.
In the report Willis Re commented on the catastrophe bond market and indicated that cat bond investors were especially receptive to new deals excluding first event U.S. hurricane risk, which we found particularly interesting given that it reflects our own opinion that investor appetite for the sector remains high. So we contacted Willis and spoke to Bill Dubinsky, Managing Director and Head of ILS at Willis Capital Markets & Advisory, to ask why he thought this was so and whether the trend would continue.
He told us that over the past few years, the percentage of outstanding cat bonds exposed to US hurricane risk has increased to nearly 70%. As investors have added to funds under management, they have increasingly supplemented their cat bonds with industry loss warranties and collateralized reinsurance, which also have healthy concentrations of U.S. hurricane risk. Most dedicated investors, he said, simply want to limit the downside to their portfolio from a single large hurricane and thus have limited appetite for additional risk.
He continued; “Dedicated investors welcome diversifiers (viewed by some as anything other than first event U.S. hurricane risk) because it helps them grow their assets under management and potentially reshapes their risk return profile. You could argue that adding risks other than first event hurricane risk has a multiplier effect because for each $300M of new diversifying risks, investors in the aggregate can bear another $700M of US hurricane risk without changing the concentration percentage. Perversely, the Tohoku earthquakes had the reverse effect by removing the diversifying capacity represented by the Muteki bond.”
“In addition to adding diversifiers, to the extent capital markets generalists add capacity alongside the dedicated funds, this would also increase the market’s ability to absorb more risk as they tend to focus more on the risk return profile of investments from an overall portfolio perspective than from an insurance risk only perspective.”
So one reason for the demand for ILS from investors is a desire to diversify their existing portfolios, hence the interest in anything but U.S. hurricane risk. The other reason we hear from investors for high demand is an increasing perception that catastrophe bonds and insurance-linked securities could offer a broadly non-correlated investment opportunity offering decent returns at a time when the outlook for certain other assets and financial markets remains uncertain.