January 2017 Renewals 'Orderly But Delayed' As ILS Expands Further

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Includes: GLRE, HVRRF, HVRRY, SSREF, SSREY, TPRE
by: Steve Evans

The January 1st 2017 reinsurance renewals are taking longer to come to market and to close, resulting in a more delayed renewal than seen in recent years but with the market remaining orderly, according to analysts at KBW.

At the same time there is no shortage of insurance-linked securities (Pending:ILS) capital ready to be deployed into any attractive opportunities that emerge and while ILS capacity growth has slowed through 2016, the expansion of the collateralized market is continuing.

In recent years the January renewal has seen reinsurance submissions presented increasingly early on in the prior year, as some ceding companies have looked to seal their coverage in advance of the end of year rush.

There has been some evidence of this in late 2016, with a number of renewals already completed and some collateralized covers and catastrophe bonds launching a little earlier than anticipated, but generally things do seem to have slipped at this renewal.

"This year's submissions are taking longer to come to market and to close, but the overall market has been orderly with no material changes sought to terms and conditions," KBW's analysts concluded after their annual trip to discuss market conditions with Bermudian players.

The analysts expect prices will decline at the forthcoming January 2017 reinsurance renewal, but they do see increasing signs of the floor approaching (although not quite being here yet).

The most pressure is being seen in the retrocessional reinsurance market, the analysts found, while U.S. property catastrophe reinsurance pricing is expected flat to slightly down around 3%, international lines down 3%-5%, and Australian renewal rates down more at 5%-7%.

While this renewal looks set to keep reinsurance underwriters and ILS fund managers at their desks right to the end of the year and perhaps into January, as there are always renewals that fail to close until after the 1st January, the appetite to assume risk is ensuring most ceding companies get what they want.

ILS capacity is particularly competitive at this renewal, which we've seen evidence of in the drop in pricing on catastrophe bonds in the second-half of 2016. The pricing differential between ILS, catastrophe bonds, or other collateralized reinsurance solutions and traditional rated reinsurance capacity is becoming negligible, although differences in coverage do still persist.

"ILS market prices appear broadly similar to rated paper," KBW's analysts found during their Bermuda trip, but they added that many ceding insurers still prefer a rated balance-sheet. However, the rated balance-sheet can now be "slightly more expensive" but it does offer protection for all perils and more flexibility in terms of reinstatements and other post-loss benefits.

This increasing convergence in pricing, between ILS and traditional reinsurance, has expanded into a convergence of terms with the help of fronting reinsurers and mechanisms allowing features like reinstatements to be supported at a cost.

As this convergence continues, the arguments for sticking with rated paper become less important and the steady increase of ILS penetration into reinsurance markets is likely to continue and perhaps accelerate over the next few years. Additionally, the benefits of adding collateralized cover to diversify risk capital sources are becoming increasingly widely understood among the insurance and retro seeking reinsurer community.

And interest remains high among investors to deploy more capital into insurance risk. KBW's analysts found that there is "No shortage of additional funds interested in deploying capital if opportunities emerge."

At the same time the ambitions to expand ILS' footprint persist, with ILS capacity still "Looking to enter and expand into casualty lines where appropriate as well" although KBW says this still remains largely "theoretical."

Looking ahead to 2016, KBW's analysts remain wary about reinsurers as a sector, with brokers offering the greatest value to equity investors in their view

"We view the brokers as the best P&C sub-sector for 2017, followed closely by personal insurers; we're cautious on standard and specialty commercial insurers, and even more so on reinsurers," the analysts explained.

With reinsurance renewals being negotiated still and final terms yet to be delivered in some cases, it does look like the market will be working right up to the end of the year. But with ILS becoming increasingly cost-comparable with traditional reinsurance and capital interest remaining high from ILS investors, it seems likely that overall ILS capital in reinsurance will grow at this renewal and into 2017.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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