First quarter pricing update

US ILW prices have held steady since the beginning of the year and secondary cat bond yields finished the quarter at a similar level to 12 months earlier. But talk of the bottom of the market may be wishful thinking as capital continues to to flow into the market at almost $400k/hour. In Japan, reinsurance prices continued to fall at the key April 1 renewal date.

Velocity of money

The gradient of InsuranceLinked's AUM chart shows that, in 2015, the growth rate of the specialist insurance linked funds slowed by more than 50% relative to its peak in 2013. But low single digit returns were enough to outperform many other asset classes in 2015. This could lead to renewed interest from institutional investors.

AUM Growth

Net of the organic growth,$3.4 billion of capital flowed into the specialist ILS funds in 2015 ($390,000/hour) compared to $10.9 billion in 2013 ($1.2m/hour).

US cat bonds and ILWs

For more than two years, cat bond pricing has held firm while other parts of the reinsurance market have experienced falling rates. According to the latest figures from RMS, risk adjusted US cat bond yields were at very similar levels to the end of Q1 2005 (slightly up for multi peril bonds and slightly down for wind only issues). But about $2.5 billion of bonds are maturing in the second quarter and it is not clear whether there is a sufficient pipeline of new issues to replace them.

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Here is Guy Carpenter's ILW. Pricing was stable in the first three months of the year. Click here for the full chart.

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Japan renewal season

The peculiarities of the Japanese financial year mean that most reinsurance contracts renew on April 1. According to the latest figures from Guy Carpenter, Japanese earthquake ILWs fell 10%-15% while typhoon ILWs fell 17.5-22.5% compared to April 1 2015. Willis estimated that loss-free, wind and flood reinsurance rates fell by 7.5% to 10% while earthquake rates fell by 7.5% to 12.5% - although more and more cover is being purchased on a combined basis.

Japanese reinsurers purchased additional limit at the top of programmes. Two insurers also issued typhoon cat bonds - Mitsui Sumitomo's $200m Akibare Re and Sompo Japan Nipponkoa's $220m Aozora Re. Both bonds were upsized and placed at the low end of guidance (2.5% and 2.2% respectively).

Fund returns

According to Eurekahedge, first quarter fund returns rose slightly compared to the same period in 2015 - 1.17% from 0.84%. Much of this uplift can be explained by the the MultiCat Mexico class C notes which settled in February at 50 cents in the dollar having traded as low as 4.35 cents.


Posted: Monday, May 2nd, 2016