Third-party capital makes a competitive environment for catastrophe bond issuance: Willis Re

At the key 1st January reinsurance renewals the global reinsurance industry capital base remained adequate thanks to an accelerating inflow of new capital, according to Willis Re in their report on the 1/1 renewals. The reinsurance broker said that thanks to inflows of capital and continued demand for catastrophe event risk as an asset class, it believes there is a competitive environment for catastrophe bond issuance right now.

Willis Re’s reinsurance renewals report looks at the state of the market at the key juncture of the January renewal season and discusses rate trajectory, conditions, the collateralized and retrocession markets, and various lines of reinsurance business. Our article from earlier today looks at the reinsurance rate trajectory, while here we focus on the comments on catastrophe bonds and third-party capital inflows.

Willis Re said that long-term investors continue to be attracted to catastrophe event risk as an alternative and uncorrelated asset class. In fact the inflows of new capital into the reinsurance space are accelerating according to the broker and third-party capital activity has been picking up as well as broadening its interest in the space.

This has been evidenced by successful fund-raising by a number of sidecars and new property catastrophe and retrocession funds, which have in some cases been more successful at raising new capital than the insurance-linked securities (ILS) funds which are focused on catastrophe bonds.

Investor demand for cat bonds continues to outstrip supply and Willis Re said in their report that this makes for a competitive environment for catastrophe bond issuance. No cat bonds have been triggered by hurricane Sandy as yet, this and the recovery in pricing seen post superstorm have been positive for the sentiment of investors and helped to grow interest in cat bonds as an asset class even further. Willis Re sees a positive pipeline for catastrophe bond deals in Q1 of 2013 and said that the pipeline is ‘developing well’.

It’s going to be worth watching whether cat bond spreads remain near the historic lows seen in recent months as if they do, and if investor capital interest remains strong, we could see Q1 cat bonds upsize and price at the bottom of advertised ranges in a similar fashion to Q3 and Q4 2012 cat bonds. Market conditions like that will help the cat bond market grow even further as we move through 2013.

While cat bonds remain an in-demand investment asset class for the capital that flows into the reinsurance space, other areas of reinsurance are becoming increasingly viable alternatives. This is especially useful to investment managers when cat bond issuance capacity is insufficient to meet investor demand. As third-party capital continues to flow into the reinsurance market new business models are emerging as reinsurers look to leverage their underwriting experience in partnership with a fund entity or investment managers backed by investors with a longer term view. Willis Re said that these new models are now able to offer similar convenience as a traditional reinsurer, back-to-back cover at renewals (very important) and speed of execution at the same time as offering investors some added leverage.

Over the coming days we will cover commentary from other renewal reviews and end of year cat bond and reinsurance market reports.

Read about Willis Re’s reinsurance renewals report in our article ‘No blanket reinsurance rate increases at renewals despite Sandy: Willis Re‘.