With 2017 Stress Test Passed, ILS Coming Of Age: S&P

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

With the major losses of 2017 largely behind the sector, the insurance-linked securities (ILS) market has tasked itself with becoming a trusted trading partner for ceding companies in their time of need, with the way the market recapitalised and traded forwards evidence that alternative capital continues to come of age, according to S&P.

In a recent report, ratings agency Standard & Poor's highlights the resilience of alternative reinsurance capital, explaining that the ILS asset class successfully passed the stress test of 2017's catastrophe losses.

Previously, the rating agency had warned that the hurricanes and major catastrophe losses of last year were likely to prove the first true stress test of alternative capital, ILS market structures and ILS funds.

In particular, the rating agency expected that major events hitting the ILS market's ground-zero of Florida, such as hurricane Irma, would provide a valuable stress test of the staying power of third-party reinsurance capital and investor appetite to remain invested in ILS products.

That stress test now appears to have been passed with flying colours, as the ILS fund market entered 2018 with even more capital available to it than it had at 2017 renewals.

The pace of catastrophe bond issuance so far in 2018 has also set records, providing further evidence of the ongoing advance of the capital markets into reinsurance, the resilience of the structures and investor base, as well as the appetite to continue trading in catastrophe risks. The rapid rate of issuance has continued in the second quarter.

With alternative capital in reinsurance now seen to have reached new highs, with $94 billion of ILS fund capacity now detailed in our directory of ILS fund managers, Aon reporting that it counts alternative reinsurance capacity as now amounting to $89 billion at the end of 2017 and cited 10% growth in the year, and Willis Re citing 17% growth in 2017 to $88 billion, it seems that having passed the stress test of the previous year the ILS market is now reaching for new heights in 2018.

S&P notes that based on its conversations with industry stakeholders and contrary to some beliefs, the January reinsurance renewals were not disrupted by alternative capital and the renewals went off in an orderly fashion.

In fact, many ILS markets remain keen to support price increases where possible, having suffered large losses in 2017. But the competitive nature of traditional markets and the efficiencies in cat bonds and syndicated transactions simply mean that rates are not rising as many would have liked. This is not disruption, rather a new market pricing reality and evidence of a flatter, more efficient, reinsurance market cycle.

Alternative capital is set to continue coming of age and the impacts of the maturity of this market and the key role it plays in global catastrophe reinsurance are set to ensure that pricing remains keen, the cycle remains flatter and capacity will remain available.

"Given the magnitude of losses suffered, and that the subsequent capital reloads went without a major hitch, we believe alternative capital has passed its stress test and continues to come of age," states S&P.

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