The talk at the Monte Carlo Rendez-Vous last week among ILS players was around the expectations on property cat rates, who has capital – how much and where from, and the proliferation of casualty structures in the ILS market.
The casualty ILS space has gained momentum in the past six months, boosted by interest from investors who want to capitalise on the higher-rate environment and work their assets twice against an underwriting income stream as well.
Cat bond giant Fermat entered the segment by taking over Ledger Investing’s fund management business. Meanwhile US manager Pimco partnered with Aspen on Bermuda-based reinsurance vehicle Pando, focused on casualty business.
The time span of casualty investments was a key talking point for managers exploring casualty ILS products, with sources noting that some offerings were reproducing the reinsurance to close design used at Lloyd’s, which provides liquidity for investors.
One possible structure lets investors buy an option at the outset of the deal that provides for a legacy transaction giving them an exit after two or more years. This type of solution is not universally liked, with some ILS commenters believing that investors with a longer-term investment horizon are generally a better match for casualty risk.
Property cat rates
On core ILS property cat business, managers accept that rates will likely reduce from their hard-market highs. The focus in on how far and how fast.
The scrap over rate looks likely to be most aggressive on remote risk covers, with cat bonds competing with traditional reinsurance in this space. Underwriters in both segments are showing appetite for risk at or below an expected loss of around 5%, sources said.
Brokers continue to advocate for aggregate covers and for capacity closer to the risk.
One noted substantial sponsor interest in deals with an expected loss of 8% or more, which would more typically be covered by private reinsurance/ retro, than cat bonds.
The trend of ILS capital having become less fungible between cat bonds and collateralised re was also noted, with the expectation that it will drive cat bond market growth this year. Capacity that is “locked-in” could support a 15%-20% uplift in new issuance, from around $15.8bn in 2023 to around $18.7bn in 2024.
This would be ahead of the $15.6bn annual average forecast for 2024 by brokers in January, but with $12.3bn completed at the mid-year mark there is still a way to go to overtop expectations.
The impact of maturities on market capacity will depend to an extent on whether sponsors renew like-for-like. Upcoming Q4 cat bond maturities will free up $2.1bn of notional, compared to around $5bn in Q4 last year.
The deals include several of the cat bond market’s more esoteric transactions, such as risks from corporate and utility company sponsors, as well as three retro bonds.
Generally, the assumption is that cat bond spreads will move lower, although until hurricane season is over, there is uncertainty over what capacity will ultimately be available.
Indications from the wider reinsurance market include Guy Carpenter’s property cat rate-on-line index, which increased by 1.2% at the mid-year renewal compared to July 2023. However, the rate of increase had slowed from 5.4% recorded at the January 2024 renewal, compared to a year earlier.
Gallager Re put property rates flat-to-down 10% at 1 July.
Market messaging
This year, it was especially hard to pick a way through the smoke and mirrors game of the Rendez-Vous, whereby brokers talk down the rate environment and managers are coy about capacity levels.
The “hurricane season from hell” warnings in April/ May mean that mid-season discussions about what may happen with inflows or outflows come November/December are even more tentative than usual.
If a big storm strikes, rates will be hiked – but will capital pile in or draw back? If there is no big hit, will opportunistic investors trim their allocations or cut and run in search of higher returns elsewhere?
ILS brokers have a careful line to walk in calling for rate efficiency on behalf of clients without telegraphing lower return expectations to investors.
Taken at face value, ILS managers mostly have not raised significant capital at this stage. The reinsurance market’s messaging will be influential in how their efforts unfold ahead of 1 January.