Palomar shuns Torrey Pines cat bond renewal due to pricing & terms

Palomar Insurance Holdings, the speciality California-based insurer that provides largely catastrophe exposed property covers, cancelled its plans to renew its maturing catastrophe bond transaction in March, when it saw the way pricing and terms were firming in the insurance-linked securities (ILS) market.

Palomar sponsored its first catastrophe bond back in 2017, successfully securing $166 million of fully collateralised reinsurance protection from the Torrey Pines Re Ltd. (Series 2017-1) deal.

The insurer had been planning to renew that this year, with the three-year term of coverage coming to an end this month.

But on approaching the ILS market about a renewal and seeing some of the pricing and terms being proposed for catastrophe bonds in March this year, the insurer shunned the cat bond renewal and reverted back to traditional reinsurance, its executives explained during yesterday’s earnings call.

Palomar added another $145 million of reinsurance limit to support its continued growth and expansion at the January renewals, taking its reinsurance tower to $1.2 billion of coverage for earthquake events.

But the Torrey Pines Re catastrophe bond that provided multi-peril and multi-year reinsurance against losses from U.S. named storms, severe thunderstorms and earthquakes was coming due for renewal later this month and now drops out of the program for the moment.

Mac Armstrong, Chief Executive Officer and Founder of Palomar explained the reinsurance plans for mid-year 2020, “I’m pleased to report that we have placed all of our reinsurance program as we sit here today.

“We are finalising contract terms & conditions and signing final lines, but all the limit has been placed, so we’re thrilled to report that. What I would say is the reinsurance market is hardening.”

He continued to explain that while reinsurance is hardening, the increases aren’t making reinsurance less accessible.

“While we’ll see a risk-adjusted increase in the cost of reinsurance, in many ways it’s catching up with what we’ve seen in the primary market and I also believe that what it will lead to is further dislocation in the primary market hat will allow us to recoup or sustain our margins, generally speaking,” he explained.

Armstrong referred to this dislocation earlier in the call, saying that commercial lines of insurance have been firming and could do so even more, driven partly by Covid-19 related effects that are causing some commercial property underwriters to retrench or withdraw limits.

“I think also, the reinsurance market is hardening which will impact others and what they can write. So we actually believe that the dislocation is going to be more pronounced in the second quarter, in the second half of this year,” he said.

Referring directly to the Torrey Pines Re catastrophe bond and why it is now not going to feature in Palomar’s reinsurance tower any more, Armstrong said, “The market is changing and I think one of the drivers of it was around the ILS market.

For us, we were anticipating going out in the ILS market but we pivoted pretty quickly when we saw illustrative pricing and some of the terms & conditions that were being put in the market in March.”

March was the time when the secondary market saw significant selling pressure, elevating spreads and at the same time some cat bond issuances were pulled or postponed largely due to investors being occupied elsewhere.

But since then the coupons on recent catastrophe bond issues have certainly risen, as the market for cat bond backed reinsurance and retrocession has firmed considerably.

For Palomar it seems this was too much and it could secure the coverage elsewhere, likely a portion of which will have been collateralised or fronted coverage from ILS funds or third-party capital vehicles anyway.

“So we decided to not go down that path, Armstrong said. “We’ve gone back to the traditional market and we’ve got a great reinsurance panel that supported us, again, we’re pleased that it’s wrapped up.”

It’s a shame to see Palomar pivot away from the catastrophe bond market, but as said above its likely a decent chunk of its reinsurance program is ILS market supported anyway.

Cat bond market pricing will not be for everyone right now. But still the multi-year benefits and ability to diversify reinsurance and retrocession programs into the capital markets will continue to draw in many sponsors, as we’ve continued to see over the last two months, despite the uptick in pricing seen.