Guy Carpenter analysts have reported that overall catastrophe bond offerings during the recent Janurary renewals continued to attract significant capital, while syndicated sidecar and collateralised reinsurance strategies experienced limited new inflows of capital.
January 1 allocations were said to have been complicated by Covid-driven year-end loss reserve “buffering” and a high frequency of mid-size catastrophe losses in the US, creating uncertainty regarding the level of capital available for new and renewing placements.
“New issuances in the catastrophe bond market have been very buoyant in the fourth quarter,” said David Priebe, Chairman of Guy Carpenter,
“Most fourth quarter issuance was well supported, which enabled many buyers to secure the top end of their size targets (or beyond) at the lower end of price guidance.”
Meanwhile, Willis Re analysts noted that the overall ILS market saw two opposite trends in the past few months.
On the one hand, collateralised reinsurance and sidecars saw a contraction of capacity as investors focused on underwriting discipline following another year of trapped collateral, this time led by potential COVID-19 losses.
Concurrently, the cat bond market rebounded strongly after the summer, with the majority of bond issues being upsized and/or pricing at the bottom of guidance or below.
Willis Re says this demonstrates the fact that investors are valuing more the transparency and clear peril definition of the cat bond product, as well as the liquidity offered.
Howden observed another year of losses and limited capacity in the retrocession market, causing risk- adjusted retrocession cat excess-of-loss rates-on-line to rise by 13%1 on average.
Although capital inflows capped rises below early expectations, Howden analysts say four consecutive years of price increases has seen the cost of retrocession protection return to levels last recorded at 1 January 2013.
Furthermore, despite the draw of a more attractive pricing environment, investor appetite to back collateralised reinsurance or sidecar transactions was held back in some quarters by heightened risk aversion following successive years of losses and lacklustre performance.
Persistent adverse development on prior years, concerns about COVID-19 business interruption claims, 2020 U.S. catastrophe events and increased scrutiny around climate change drove risk premia higher.
Markets also looked to provide greater coverage clarity by moving towards named perils only, as well as imposing exclusionary language around cyber and communicable disease.
The impact on supply was said to be significant; third-party capital is estimated to have provided up to 80% of capacity for the retrocession market before last year’s pullback.
The catastrophe bond market fared better through the dislocation, however, with investors attracted by its liquidity, peril specificity, certainty and diversification, and issuers appreciative of a cost-effective alternative.