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No sign increasingly disciplined pool of alt capital will shrink: Peel Hunt


Despite a slowdown in the growth of alternative reinsurance capital in more recent times there’s no sign of the pool shrinking, and with a wealth of capacity waiting to enter post-event it’s unlikely a large event will turn the market, according to a recent note from Peel Hunt.

It’s clear that the growth alternative reinsurance capital has slowed when compared with the record-breaking volumes seen in 2014 and 2015, a period where catastrophe bond issuance spiked and third-party capital meaningfully increased its share of the overall reinsurance market volume.

But despite a slowdown the market is still growing, a trend that was recently highlighted by Aon Benfield’s note that alternative reinsurance market capacity increased by 4% during the first-half of 2016, to an estimated $75 billion.

According to analysts at Peel Hunt, assuming total reinsurance capacity remained relatively unchanged since the end of 2015, “we estimate that alternative capital contributes an unchanged c.20% of reinsurance limit.”

“There are no signs alternative capital pool is shrinking despite some venture being pulled earlier this year. Hence, combined with growth in traditional reinsurance capital, there are no signs that excess capacity is leaving the market, just growing more slowly,” said the firm.

Willingness from the broad range of capital markets investors to assume insurance and reinsurance-linked exposures appears to remain strong, suggesting that discipline in the softening market is more likely the reason for a reduction in capital inflow.

Peel Hunt underlines that the alternative market has “become more disciplined in an increasingly low margin environment for underwriting natural catastrophe perils in particular,” a trend that has been noted by a number of market analysts and observers in recent times.

As shown by the Artemis Deal Directory and Artemis quarterly Catastrophe bond & insurance-linked securities (ILS) market reports, issuance in 2014 and 2015 was impressive in the cat bond space. And while a record first-quarter of issuance in 2016 saw the market grow further, a notable slowdown in the second-quarter saw the market contract.

However, “Collateralized Re structures are still being launched partly through the Lloyd’s market backed by third party investors and offsetting reduction in Cat Bonds,” explains Peel Hunt.

It’s been reported that collateralised reinsurance placements and structures now contribute more to the overall reinsurance capacity than catastrophe bonds and other forms of ILS. A trend that has helped the market grow despite traditional 144A cat bond issuance declining.

The continued, albeit moderated growth of ILS looks set to continue and with the expectation across the reinsurance industry that third-party capital is sat on the sidelines waiting for the next large event, it’s tough to see a large catastrophe turning the market, explains Peel Hunt.

“We conclude that there is little to suggest the soft market will turn anytime soon even after a sizeable event. The ongoing development of Alternative Capital structures will cap a cycle turn and keep the market soft in our view,” said Peel Hunt.

This is another topic that has been discussed across the industry in recent months as the market looks for trends that could start to turn the softening landscape.

But the reality seems to be that the excess capacity in the space, combined with the volumes sat outside waiting to enter, will compress any price-surge post-event and possibly flatten the reinsurance market cycle moving forward.

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