In a recent interview Artemis spoke with Darren Redhead, Chief Executive Officer (CEO) and Mathieu Marsan, Senior Portfolio Manager & Actuary, at third-party capital and reinsurance-linked asset manager Kinesis Capital Management.
They discussed the outlook for the catastrophe bond and insurance-linked securities (ILS) space in 2017, and the potential for greater ILS penetration into specialty reinsurance lines, a key focus of Kinesis Capital Management.
Kinesis is predominantly focused on underwriting multi-class, specialty focused reinsurance lines, leveraging the significant experience its parent company, Lancashire Holdings, has in the specialty underwriting space.
What are your thoughts on the increased penetration of ILS and third-party capital?
- Overall, alternative capital could go from $78 billion to $83 billion over the course of 2017, absent of any market-changing event, but the real question again this year is, “Is there enough well rated and sustainable business for that level?”
- Some ILS managers may struggle to find good business, and might end up with more excess cash than anticipated.
- Entities backed by reinsurers will also continue to grow modestly on average and continue to build up favourable track records.
- As we saw in 2015 and 2016, we’ll probably see at least one independent third-party asset manager partner with (or be acquired by) a traditional rated entity or investment management firm.
How might the catastrophe bond market fare in 2017?
- We expect a continued slowdown as the traditional market offers a greater number of multi-year deals.
- Some form of growth in private placement catastrophe bonds is likely, in an effort to save costs and remain competitive.
- We’ll probably see new cat bond sponsors coming in again this year, and potentially new perils-regions being offered on the property catastrophe side, maybe even from China.
- The time may even be right for a bond covering new reinsurance classes, like a marine & energy, or terror only catastrophe bond. Horse Capital with its motor third party liability bond was a good example of this, in 2016.
What are the prospects for traditional reinsurers in the coming months?
- We’re not done with M&A – other large ones will occur in 2017, which will have a significant impact on smaller ILS entities/reinsurers, and brokers.
- ROEs of traditional reinsurers will go down sharply in 2017, with many analysts readjusting/recalibrating their return expectations for the reinsurance market in general.
- More ventures like ACE/Blackrock will be seen, which again will have a material impact on brokers and reinsurance sellers.
- Partnerships between Lloyd’s and ILS entities will also continue to increase.