Over the next few quarters the insurance-linked securities (ILS) and catastrophe bond market will have an opportunity to recycle in excess of $6 billion of third-party reinsurance capital, as cat bond maturities accelerate due to the glut of 2011/12 vintage bonds.
According to data from the Artemis Deal Directory upwards of $6 billion of the outstanding cat bond and ILS market will mature over the next three quarters, with Q1 of 2015 alone seeing over $4 billion and Q2 2015 another $2 billion of maturing cat bonds.
In total we count 37 cat bond or ILS transactions which are due to mature by the middle of 2015 amounting to just short of $6.4 billion. This is a significant amount of freed up capital for the market to recycle in the current soft reinsurance (and ILS) market environment.
The capital that is freed up from these maturing deals is going to come back to the market at an interesting time, when pricing is already soft and cat bond or ILS rates are almost as low as they’ve ever been. Much of this capital will seek to be put back to work in the ILS and reinsurance space, by the ILS managers that are looking after this capital and much of it will likely be put into either new cat bond issuance, some of which could be renewal deals for the maturities, as well as into private ILS or collateralized reinsurance transactions.
The news we published yesterday that some leading market participants forecasting $2.5 billion to $3 billion of new catastrophe bonds over the coming few months may not help, as the bulk of this maturity capital won’t come back to investors until 2015. So the Q4 issuance pipeline may provide ILS managers with an opportunity to put new capital to work and to accept new inflows which have been waiting on the sidelines.
But with $6 billion of maturing ILS capital set to be ready for recycling into new deals in 2015, it’s interesting to ponder how the reinsurance and catastrophe bond/ILS market might react to this large amount of capital needing to be put back to work?
One thing these maturities do is free up a lot of risk from reinsurance and retrocession programmes which will need to be covered in some way. That gives a huge opportunity to the catastrophe bond and ILS market to secure as much of this freed up risk in renewal deals, either as cat bonds or collateralized reinsurance.
Of course the traditional reinsurance market is likely to compete very strongly to win back some of this risk, as it has been locked up in cat bond form for a number of years. $6 billion of risk coming up for renewal might be enough to tempt some property catastrophe focused reinsurers to compete very strongly to win this business, which could lead to further erosion of pricing margin and maybe even further relaxation of terms and conditions.
That could be dangerous for a reinsurance market which is already very soft. There is likely a point where catastrophe risks become uneconomical, below technical pricing, for most reinsurers and given that some larger players believe we’ve reached that point on some programmes any further competition to win this maturing business may be detrimental to reinsurers involved and the market as a whole.
So maybe traditional reinsurers would be better off encouraging these risks back into the cat bond market, to be locked up again for multi-year periods, while they focus on generating business elsewhere? Of course it is not guaranteed that the cat bond market will even get that chance to renew this business anyway, given the changing reinsurance buying habits of major insurers perhaps some of this won’t get renewed at all.
Some of these deals, we understand, have already come up for renewal discussion and there is a chance that a few sponsors may renew the cover at January 1, even if their cat bond or ILS matures later in the first-half of 2015. Reports from market participants suggest that traditional reinsurers are competing strongly for January renewal business and this could herald further price declines, perhaps steeper than had been expected at 1/1.
Where this freed up risk capital gets deployed and how the maturing risks get renewed, will come down to the appetite of the traditional players to compete, the buying habits of the large cedents and whether ILS players push it towards catastrophe bond or securitized solutions, versus collateralized reinsurance participation in traditional programmes.
As this dynamic plays out there is the potential for both traditional and alternative sides of the market to lose out, to a degree.
The traditional market could lose this to ILS and with it larger shares of some of the reinsurance programmes coming up for renewal. Or the ILS players may lose out as the traditional reinsurers drop their prices and expand their terms to secure the business.
For ILS investors these maturities will provide an opportune moment to prove their consistency and staying power, by helping cedents and sponsors to renew, grow their cat bonds and access even more ILS capital as part of their reinsurance or retro programmes. For the traditional reinsurers these maturities provide an opportunity to win back some business from the ILS market, which could gain them larger shares of these programmes for future renewals.
As a result the competition for these maturing risks could be fierce.
Finally, it is to be hoped that brokers could temper this competition by pushing their clients to use the most efficient and optimised solutions, which provide the coverage and terms they require, while being agnostic as to the capital and collateralization structures. That would be the best result for the buyers, allowing them to make informed decisions as to how best to renew their protection, which over the long-term may be better for both the traditional and non-traditional reinsurance capital anyway.
Artemis’ Q3 2014 Catastrophe Bond & ILS Market Report – A lazy summer for ILS
We’ve now published our Q3 2014 catastrophe bond & ILS market report.
This report reviews the catastrophe bond and insurance-linked securities (ILS) market at the end of the third-quarter of 2014, looking at the new risk capital issued and the composition of the cat bond & ILS transactions completed during Q3 2014.