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Catastrophe bond issuance has ‘gradually tapered off:’ A.M. Best


January 7, 2017   by Canadian Underwriter


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The entry of third-party capital into the reinsurance market appears to be slowing down, while demands from reinsurers “for further concessions in terms” appear to be diminishing, A.M. Best Company Inc. suggested in a report released Friday.

Financial AnalysisOldwick, N.J.-based A.M. Best released its latest Review/Preview of Global Reinsurance in a report titled Restraint in a Challenging Market Environment.

A.M. Best estimated there was $420 billion in total dedicated reinsurance capacity in 2016, up from $400 billion in both 2014 and 2015. All figures in U.S. dollars. A.M. Best broke it down by traditional and convergence capital, “which includes industry loss warranties, collateralized reinsurance and cat bonds.”

Convergence capital “continued to enter the reinsurance market, albeit at a slower pace,” A.M. Best said in the report.

“Third-party capital continues to take a larger piece of the pie, but the speed of capital market capacity entering the market seems to have slowed compared to prior years and some collateralized markets have held capacity flat, unable to find suitable opportunities.”

Quoting from Artemis, A.M. Best reported total cat bond issuance as $6.2 billion during the first nine months of 2016, comprised of 37 deals. There were 45 deals in 2014 and 48 deals in 2015, with $9 billion and $7.9 billion in issuance in 2014 and 2015 respectively.

Risk capital stood at $21.3 billion as of June 30, 2016, A.M. Best reported Sept. 5 in its global reinsurance market review.

“Peak exposures such as U.S. wind, U.S. earthquake, European wind, Japanese earthquake and Japanese typhoon continue to dominate the cat bond market,” A.M. Best said at the time in its market review.

“Cat bond issuance continued to grow strongly through year-end 2014 but has gradually tapered off in 2015 and 2016,” A.M. Best said Jan. 6, 2017 in its review/preview.

In its market overview issued in September, 2016 A.M. Best reported there was a US$50 million loss on the MultiCat Mexico Ltd. cat bond – sponsored by Swiss Re – when its Class C notes were triggered in October, 2015 by Hurricane Patricia.

“Despite the trigger events that caused varying degrees of principal losses on 14 transactions from the hundreds of cat bonds, market participants have not abandoned this asset class,” A.M. Best said at the time.

“The Global Reinsurance market remains competitive, even as cession rates have begun to tick up, driven by the relatively stable terms and conditions available in the market,” A.M. Best said Jan. 6, 2017 in its review/preview. “Some observers believe that we may be nearing the bottom of the soft market as brokers are experiencing greater difficulty filling out underpriced programs and demands for further concessions in terms diminish.”

On Dec. 12, 2016, A.M. Best reported its outlook for the reinsurance sector was negative.

“Low rates, broader terms and conditions, unsustainable flow of net favorable loss reserve development, anemic investment yields, and continued pressure from convergence capital are all negative factors that will adversely impact risk-adjusted returns over the longer term,” A.M. Best stated Dec. 12 in the special report titled Global Reinsurance Outlook Maintained at Negative. “The reality of the present situation is that a major catastrophe will occur at some point and the mask of redundant reserves will eventually be removed to reveal the true ramifications of current market conditions. If history is a guide, it may be more ominous than some believe.”