September 2014 56 Bermuda:Re/insurance+ILS


Luca Albertini, CEO of Leadenhall Capital, agreed that the market is experiencing pricing pressure, but questioned whether this pressure will be sustained. “Secondary market pricing this year is following a very similar trend to the one of last year. Last year by the end of September the market recovered all losses and went beyond, thus pointing to softer conditions which we have then seen confirmed at December renewals.


“I cannot predict if the same will occur again, but what I can reasonably expect is that the market will recover most if not all of the secondary pricing which was lost in the first half of the year.”


The secondary market has a bearing on pricing, particularly as issuance volumes increase and the level of potential liquidity grows. But as Bill Dubinsky, head of ILS at Willis Capital Markets & Advisory explained, cat bond activity and liquidity aren’t always the same. “Investors tend to trade around a catalyst such as a loss, new issuance or broader financial market developments.” He said that while secondary market trading can be a guide to pricing “we tend to place less credence in secondary pricing if there is less activity in the market”.


Dubinsky said that the market is “reaching a phase of dynamic


equilibrium”, with some areas experiencing price firming, while others continue to soften. He said that it was difficult to characterise the market at this point, even if there had been general softening at the start of the year.


Schultz explained that this is a feature of the ILS cycle, with a quiet period apparent during the middle part of the year. “Trading tends to be down and pricing flat because unless someone is trying to rebalance their portfolio or put significant capital to work, it tends to be a little quiet during the middle months.” He predicted flat to down rate movement during the second half of the year.


“The whole market is at a price point now that is very attractive. At some point there are minimum return requirements for any type of market—be that capital markets or traditional reinsurance—and that has been tested a fair amount in the first half of the year. I believe we are going to see more minimum price transactions come out in the second half of the year,” said Schultz.


Investor appetite


With the price coming down and the potential for further downward movement, the question then becomes: are investors beginning to walk away? It is apparent that in some instances ILS funds are turning investors away aware that they cannot meet minimum return hurdles in the current environment, but there nevertheless continues to be strong interest in convergence investments.


As Dubinsky explained: “There are some areas where investors, for the moment, have as much as they want of certain risks and


“I believe we are going to see more minimum price transactions come out in the second half of the year.”


at certain prices, but there are other areas where they have unmet needs and plentiful capacity. A functioning market corrects prices to address that.”


Addressing specifics, Dubinsky said that for non-US hurricane risk such as Japanese earthquake and European windstorm with a 50- year return period, there remains “plentiful demand and continued downward pressure on spreads”. However, with remote, 200-year return period US hurricane risk, there has been a “stepping back” by the market which has perhaps felt that it needs to be paid a little more for that risk. Despite general conditions however, well-priced bonds will continue to attract considerable investor interest, Dubinsky citing the scaling up of Citizens’ Everglades Re transaction as a case in point.


Hochberg said it would be hard to generalise whether investors are


pulling back from the market. He explained that the risk:return profile of the various funds and managers would likely dictate appetite for future issuance, adding that pressure has been applied by traditional markets becoming “more aggressive to protect their positions vis-à-vis the capital markets”. Nevertheless, the non-correlation advantages of cat bonds and good returns on a relative basis, will likely lead to a “pause to digest, rather than any pullback” from the sector.


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