Keane Driscoll, Chief Executive Officer (CEO) of Validus Re, the reinsurance arm of Validus Group (NYSE:VR), expects to see an uptick in catastrophe bond issuance in the coming months as the appetite for insurance-linked securities (ILS) investment persists.
Despite the global outstanding catastrophe bond market ending 2016 at its largest ever size, of $26.82 billion, the volume of deals brought to market declined when compared with the previous three years.
Thanks to continued growth in the collateralized reinsurance market and steady, albeit reduced catastrophe bond issuance, alternative reinsurance capital continues to claim a larger slice of the overall reinsurance industry pie. However, pressures felt across the insurance and reinsurance industry are also impacting the ILS space and returns in the sector aren't what they once were.
But as evidenced by continued growth of the catastrophe bond and ILS space, investors remain attracted to its diversification and low-correlation benefits, as well as a steady, yet currently reduced, return.
Speaking during the Validus fourth-quarter and full-year 2016 earnings call, Driscoll explained that the competitive and challenging reinsurance industry landscape was one of the drivers of reduced cat bond issuance over the last 12 months.
"So, what we observed over the course of 2016 was that the totality of the cat bond issuance shrunk because the traditional market became more competitive. That's in context of the totality of the costs, so the frictional or administrative costs or the ease of trading the value proposition between a traditional deal versus the cat bond deal, started to narrow," said Driscoll.
As a result of this, said Driscoll, "we are seeing the traditional market win out." A trend, which, combined with the amount of catastrophe bond transactions scheduled to mature in 2017 and the volume of fixed funds dedicated to the cat bond space, could create a situation "where we see some more competitive pricing in the spreads and the cat bonds just to help facilitate the issuance of that," continued Driscoll.
"But that's our view; it's our supposition. It doesn't impact our portfolio to any great extent because, at the top end where the cat bonds are typically competing with the traditional reinsurance market, it's usually in peak perils and those are usually areas where we're allocating capital such that we're less competitive to begin with anyway.
"But from a high-level perspective, I think we will likely see an uptick in issuance just to help match the supply of ILS capital pursuing cat bonds," added Driscoll.
Reports from rating agencies, analysts, insurers, reinsurers and ILS players from the recent, key January 1st 2017 renewals points to an expectation of an increased demand for reinsurance protection, which typically results in an increased demand and opportunity for ILS capacity.
It will be interesting to see what level of catastrophe bond issuance takes place in 2017, and whether investor appetite is able to keep up with scheduled maturities during a time when persistent headwinds challenge the position of the risk transfer landscape.
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