What is in the “strong” reinsurance capital market?

“These dynamics have enabled the reinsurance industry to be healthy from a capital perspective, despite the fact that major claims activity in the first half of 2021 peaked in 10 years due to above-average claims. in the United States and Europe. In fact, excessive capital build-up and recovery in valuations are now leading to a rebound in dialogues on strategic and transformational deals. “

Brian Schneider, senior director of insurance ratings at Fitch Ratings, described the capital outlook for the global reinsurance industry as “at a very strong point,” adding that capital has been trending positively for some time. This has allowed the industry to “withstand a lot of the unusual losses” it has suffered, according to Schneider, especially in recent years.

“Traditional capital still dominates the picture,” Schneider said. “He offers [approximately] 85% of the current capacity of the reinsurance market, and this level has been very stable since 2015. But […] we saw some alternative capital growth in the first quarter. [According to Aon’s Reinsurance Market Outlook Update], alternative capital increased by US $ 2 billion to reach US $ 96 billion in Q121. This follows declines in 2019 and 2020, when investors pulled back from alternative capital a bit due to issues with fluctuating losses and some of the trapped ILS capital that was occurring as a result of some of the major catastrophic events of 2017 and 2018. “

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Alternative capital in the reinsurance market is something Kumar and the team at GC Securities are watching very closely as it provides a good chunk of the retrocession capacity of the global industry, which therefore impacts availability. broader reinsurance.

As of mid-2021, Kumar’s team estimates that around US $ 32 billion, or 35% of the alternative capital, has been allocated to rule 144A catastrophe bonds, which are typically the type of cat transactions. most liquid bonds and apply to the resale of securities. An additional $ 11.5 billion, or 13%, was allocated to guaranteed quota shares or sidecars, and the remaining $ 47 billion was allocated to non-proportional reinsurance or retrocession. and warranty.

“The sidecar or production market has actually grown despite the past challenges of surprise losses, loss leaks and collateral trapping,” Kumar noted. “The increase in allocation is mainly due to direct bilateral agreements with founding investors rather than syndicated placements with dedicated ILS funds. In these agreements, there is a clear differentiation between ceding companies based on their past underwriting experience, loss reporting and collateral release prompts. In addition to the pressure on structural conditions, the emphasis is on overriding. Demand for this capacity currently exceeds supply.

“The 144A catastrophic bond market is on track for a record issuance this year. In the first six months of 2021, we recorded US $ 7.9 billion in new bond issues through 27 unique deals for 26 different sponsors. The first bond sponsors included reinsurers, national carriers, as well as mutuals and corporations. […] A growing number of reinsurers are exploring this market as an effective substitute for retrocession capacity through comprehensive industry index structures.

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Regarding the non-proportional guaranteed reinsurance markets, Kumar said they have increased their use of rated fronts to facilitate program participation, and they are also focusing more on contract language, coverage and exclusions; and timely loss reporting issues. .

Schneider said the catastrophe bond market has experienced “very good momentum”, generally experiencing lower losses than secured reinsurance, which continues to be the dominant form of alternative reinsurance capital.

“Bond-cats remain a very attractive investment proposition for investors, as the risk-adjusted returns are still decent enough for this classification and, of course, the advantage of diversification is a big boost for this class of. assets, ”said Schneider. “Plus, global reinsurers continue to sponsor catastrophic bonds, which I think is good for the market. We saw transactions in the first half of 2021 from Everest Re, Ren Re, Aspen, Ariel Re, as well as the new start-up Vantage. It therefore continues to be a good source of risk management for reinsurers as well. “

Alternative capital has also started to acquire environmental, social and governance (ESG) credentials, Kumar added, which are in high demand by asset managers in many countries around the world. The first catastrophe green bond was sponsored in 2021 and, according to Kumar, was “extremely well received by investors”. In addition, specialist ESG funds have started to see ILS as a potential investment category.

He added: “In the future, we expect traditional and alternative capital to continue to grow and evolve to support individuals, businesses and public entities that face increasingly complex risks. in this world. “