ILS capital ‘drawing back’ a little in mid-year renewals: Gallagher Re
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ILS capital ‘drawing back’ a little in mid-year renewals: Gallagher Re

The broker estimated ILS capacity reached a record $107bn as cat bond interest surged.

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A hardening in the later stages of the Florida mid-year reinsurance renewal was influenced by the ILS market response to severe hurricane forecasts, according to James Vickers, chairman at Gallagher Re International.

Some ILS markets were “a bit more sensitive” to these forecasts in terms of managing investor perceptions, he said. “There was a little bit of a drawing back” of ILS capital, he added.

However, the rate swings of the Florida June renewal – which started with softening before firming towards the end of the renewal – were an isolated phenomenon that had not impacted mid-year renewals beyond Florida, Vickers said.

This was also despite the fact a surging cat-bond market has helped ILS capacity reach a new record of $107bn, it estimated, similar to estimates of $110bn from rival Aon.

Overall, Gallagher Re’s 1st View 1 July renewals report described a more “comfortable” market for reinsurance buyers, as it estimated property rates were flat to down 10%.

Vickers described conditions as being consistent and said that, while reinsurers were keen to grow, they were not “breaking ranks”.

“Reinsurers have done a reasonable job of holding the line,” he added.

On the retro market, Gallagher Re said both existing buyers and returning reinsurers seeking more earnings protection were a source of growing demand.

This publication has previously reported that increased demand for ILWs led to hardening in that market.

However, there was limited new capacity, which allowed marginal softening, with supply clustered on mid-upper layers of programmes.

The firm estimated retro rates were up 5%-15% on loss-impacted business, though loss-free business was flat to down 10%.

Cat bond spreads had widened since February before stabilising in June, but they remain significantly below levels of a year ago, as the market has taken on more hurricane exposure in deals issued year to date than in the past.

Gallagher Re said more than 80% of cat bonds issued this year have hurricane exposure.

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Opaque outlook

Vickers forecast a wide range of potential outcomes for dynamics heading into 2025 depending on the outcome of the hurricane season.

A further benign year, resulting in strong reinsurer returns, would drive pressure for “reasonably significant rate reductions” next year, while a moderate loss year might prolong current conditions, and a severe loss year could get “tricky” for reinsurance buyers.

This was in line with the view expressed by Gallagher Re CEO Tom Wakefield in the report, as he said a strong year would “inevitably” pressure terms.

He said mid-year dynamics were “underpinned by an increasing supply of capital to meet demand, as reinsurers’ balance sheets have expanded on the back of strong 2023 and Q1 2024 results”.

Vickers reiterated that increased capital availability was being “self generated” by incumbents, and that rate pressure in 2025 would not be dependent on inflows of fresh investor capital after a benign year.

“Capital is not a problem – it’s willingness to deploy that capital that is there,” he added, saying this year’s outcomes show “the market believes the pricing is there or thereabouts [on rate adequacy]”.

Meanwhile, Q2 cat losses – including floods in Germany and Brazil – had helped reinforce reinsurer resolve on higher retentions, he noted.

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