News


13.09.15 SUNDAY


‘Golden compromise’ ahead for cat bond pricing: Guy Carpenter


T


he continuing influx of capital, including via insurance-linked


securities executive (ILS),


into the reinsurance sector is stabilising the pricing of catastrophe bonds, according to Guy Carpenter. Speaking


at the broker’s annual press


conference at the Monte Carlo Rendez-Vous, David Priebe, vice chairman of Guy Carpenter, said: “We believe current price levels for ILS could be a ‘golden compromise’ in which protection buyers perceive good value for fixed- price multi-year cover and investors continue to broaden and diversify their portfolios of holdings. “With the cost of issuing falling and time-


to-market shortening, this equilibrium could provide a substantial boost to the market that the record issuance of early 2015 portends.” Priebe


added of the broker, added that the


reinsurance market was continuing to evolve and adapt to changing and challenging market conditions on several fronts. “Continuing inflows of new capital and


moderate loss experience mean that capacity remains abundant, maintaining pressure on pricing, terms and conditions,” Moczarski said. “The long predicted


consolidation of


the market has now started, with inevitable consequences for rationalising reinsurance buying.”


The panel at Guy Carpenter’s press conference yesterday


prices to remain weak as supply continues to exceed demand. “It also remains to be seen whether the


that Guy Carpenter


anticipates ample capacity in the US casualty reinsurance market, with pricing not expected to firm at the January 2016 renewals. The broker also expects US property reinsurance


tactical exploitation of soft markets by some buyers, and reinsurers’ resistance to aggressive demands for decreases


January 1,” Priebe said. Alex Moczarski, president and chief


will be repeated at Commenting on pricing, Moczarski added


that average decreases had been mitigated ‘somewhat’ by more moderate decreases in US catastrophe reinsurance, especially wind peril. He said: “Reinsurers were more successful


in resisting demands for large price reductions following two years of steep declines, while demand actually increased in some lines as clients continued to seek access to innovative new products and improved terms and conditions.” n


as it heads into 2016, according to Haitong Research, which tips Lancashire and Novae as two companies likely to solicit interest from potential acquirers. Haitong noted that Sumitomo Insurance’s


Lancashire-Novae tipped for bids as M&A frenzy continues T


he Lloyd’s market will likely see more mergers and acquisitions (M&A) activity


versus more traditional cyclical stocks amid the current turbulent market backdrop,” the report said.


“Each stock under coverage holds appeal


recent acquisition of Amlin highlights the attraction of Lloyd’s businesses to investors. This is partly because the re/insurance sector


is largely uncorrelated to the wider economic environment as its performance is traditionally driven by the insurance cycle, the report said. According to Haitong, recent M&A activity is driving sector valuations, rather than the insurance cycle. The report predicts that M&A activity will continue if losses remain scarce, along with strong yields, both of which are relatively independent of China’s slowdown and its impact on the global economy. “Regardless of sector M&A, we think Lloyd’s insurers represent a relative safe haven


in the current market in our view, with those focused more on reinsurance perhaps more likely to be bid targets and those with greater focus on smaller specialty business lines having greater room for profitable growth. “We see two scenarios going forward: one,


if losses remain below average, consolidation is likely to continue; or two, if we suddenly see a large loss, pressure on rates will lessen. We believe both scenarios would have positive outcomes for investors.” Looking at potential future mergers the


Haitong report said that Lancashire and Novae are most likely to attract bids given current valuations and market conditions for the sectors where they specialise. The report added that while Beazley and Hiscox command higher valuations given


22 | MONTE CARLO TODAY | DAY 1: Sunday September 13 2015


their more diversified and specialist holdings, the Amlin deal showed the extent of the attractiveness of Lloyd’s vehicles to international acquirers. According to Haitong the interim 2015


reporting season has so far highlighted consistent, robust results from the


Lloyd’s


sector, despite continued widespread pressure on underwriting rates and the prolonged low investment yield environment. However, the report added the caveat


that underwriting


returns are being helped by an unusually long run of low catastrophe activity, which is masking the extent of the deterioration in underwriting rates. The


Haitong report also claimed that


alternative capital was here to stay, although the amount coming in might decrease in the event of interest rates increasing, thus making the reinsurance market less attractive, or if there is a significant catastrophe that might mean substantial payouts to claimants. n


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