Pricing update – second quarter 2015

The latest pricing data shows that falls in reinsurance rates are slowing. For some structures, returns have improved materially since the beginning of the year but this has not yet been reflected in fund returns.

The premiums paid for US wind Industry Loss Warranties (ILWs) increased sharply in the second quarter according to the latest data from Guy Carpenter. The market had seen seen significant rate reductions in the three quarters since mid-year 2014 but all these reductions were reversed in Q2 2015. Rates for earthquake continued to slip slightly.

Users who have registered (for free) will be a able to see the full, interactive version of the chart here.

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Guy Carpenter also found that rates for reinsurance deals in Florida fell less quickly than in previous years - the fall from 2014 to 2015 was in the high single digits versus an average fall of 15% in the two previous periods. “Many reinsurers held the line against more extreme declines even though capacity was still plentiful and low loss experience continued,” said Lara Mowery, Global Head of Property Specialty. The broker estimated that global insurance companies bought 8% more catastrophe protection in the last 12 months compared to the previous period.

Another broker, Willis, estimated that Florida reinsurance rates fell in the range of 5% to 7.5% (versus a fall of 15% to 25% over the previous year) while US nationwide rates fell by 2.5% to 7.5% (versus a fall of 10% to 20% over the previous year).

Secondary cat bond market

RMS's measure of profitability in the secondary cat bond market (the Cat Adjusted Spread) indicates that expected returns have improved over the last six months for investors in US catastrophe bonds. US wind bonds have shown the biggest increase - from 3% to over 4%.

This chart shows US wind bonds. Users who have registered (for free) will be a able to see the interactive version of the chart here.

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Fund returns

Rising cat bond yields mean falling mark-to-market bond valuations and depressed fund returns. The effect is amplified because the average tenor of catastrophe bonds has increased from less than three years to closer to four.

Guy Carpenter has indicated that there is also continued interest in longer reinsurance contracts "buyers continue to explore multi-year contracts in order to lock in current terms and conditions and smooth overall placement results going forward", said Lara Mowry. The length of the underlying contracts will affect how quickly fund returns respond to higher reinsurance rates.

According to the Eurekahedge Advisors Index (using provisional June numbers) average fund returns for the first half of 2015 was 1.3% compared to 2.1% in 2014 and 3.4% in 2013. Some funds picked up some losses from the storms in Australia in April/May but reinsurance losses for all three years have been significantly below the long term average.

Posted: Monday, July 6th, 2015