Ongoing strength & viability of cat bond market evident: Kroll


The “ongoing strength and viability” of the catastrophe bond market and insurance-linked securities (ILS) has been evident in recent transactions from major ceding insurers, according to Kroll Bond Rating Agency (KBRA).

Kroll believes that despite challenges faced in 2016, the insurance and reinsurance market once again sees itself with industry capital at or near record highs.

In addition to this, KBRA believes that alternative capital in reinsurance remains strong and notes that although the market may have been concerned by hurricane Matthew’s approach, losses to insurance-linked securities (ILS) funds have been minimal, so as a result capital continues to grow.

The catastrophe bond market continues to demonstrate itself as a strong and viable alternative source of reinsurance capacity and the use of the cat bond market by recent sponsors XL Catlin and USAA is evidence of this, KBRA explains.

KBRA highlights USAA’s long history of repeat use of the catastrophe bond market for reinsurance capacity and XL Catlin as a large and established sponsor, as evidence of the sectors strength and viability. USAA came back to the catastrophe bond market in November with the $400 million Residential Reinsurance 2016 Ltd. (Series 2016-2) issuance, its 28th cat bond transaction, while XL Catlin has brought two new deals to market, the now $750 million Galilei Re Ltd. (Series 2016-1) that will complete in 2016 and the $525 million Galilei Re Ltd. (Series 2017-1) that will complete in early 2017.

The fact that these large sponsors continue to return to the market, bringing ILS investors and ILS fund managers large slices of their reinsurance and retrocession programs, is without doubt a sign of the markets’ strength and long-term viability, as Kroll says.

ILS market capacity is rapidly becoming supportive for U.S. property casualty insurers and for reinsurance firms seeking retrocessional capacity, with its use as an efficient source of underwriting capital becoming almost as prevalent as its use as protection.

With the 2017 likely to be as challenging as 2016, if not more so, according to KBRA, re/insurers use of ILS vehicles and instruments such as catastrophe bonds may continue to grow.

As cat bond and ILS capacity is looked on as increasingly viable on a long-term basis we are likely to see U.S. property & casualty insurers and reinsurers regularly returning to the capital markets for reinsurance alternatives, as a way to help manage their cost of underwriting capital or to leverage fee income from servicing third-party investors.

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