News


Private cat bonds attract new counterparties


to be structured quickly and in a cost-efficient way is increasingly attracting more traditional counterparties which were not previously active in the insurance-linked securities (ILS) space to get involved in the market, John Butler, managing partner and head of sourcing at Twelve Capital, told Baden-Baden Today. Twelve Capital uses a private


T cat bond


issuance platform called Dodeka to issue deals. Butler said it allows the firm to introduce investors to more diverse risk through innovative triggers and counterparties which would not ordinarily have issued cat bonds on the public markets. “One of the most interesting observations in


the ILS market is that it continues to open up to private cat bonds, and that’s an area where Twelve Capital has been particularly active,” he said. “We


have found that more traditional


counterparties not previously active in the ILS space have become interested in transacting in private cat bonds and, because we have a cost- effective, simple and efficient platform, bonds


he development of specialist platforms that enable


private catastrophe bonds


can be effectively structured on behalf of our end investors. “We expect increased volatility in financial


markets going forward. By adding ILS to a wider portfolio, institutional investors will be able to reduce the volatility of their overall investments. With volatility expected to increase in the next two to three years, it is understandable that ILS will continue to have an ever-growing place within the context


of a broader and more


diversified portfolio,” Butler said. “In addition, we our


develop cross-balance-sheet


will be continuing to investment


strategy, with the launch of an insurance equity investment strategy to complement our existing ILS and debt products.” In terms of this year’s Baden-Baden


conference, Butler hopes that the idea of so-called


alternative capital is becoming


increasingly normalised as a concept, given that the ILS market is now a well-established risk transfer mechanism. “It is simply another potential means for insurers and reinsurers to obtain efficiently


John Butler


priced risk capital,” he said. “I would expect a continuation of the broadening acceptance of ILS structures with a wider range of potential cedants this year. “In addition, progress is being made in


expanding outside the pure cat arena into other lines, an initiative in which Twelve Capital is particularly active.” He stresses that the ILS market is an


example of an industry that is innovative, one that is developing to address the needs of insurers and investors alike. “We look to Baden-Baden not only to


help drive a continued convergence between re/insurers and capital markets, but also to help bridge the ever-narrowing gap between traditional and alternative investments in the insurance space.” n


Tier 1 reinsurers only winners as price floor yet to be reached T


he bigger so-called tier 1 reinsurers will be the winners in what is a rapidly changing


reinsurance landscape, Martyn Street, senior director in insurance at Fitch Ratings, told Baden-Baden Today. But he also stressed that consolidation was far from a silver bullet for companies seeking greater scale. “We continue to view major tier 1 reinsurers as


the winners in the changing reinsurance landscape and we upgraded three of the four major European reinsurers earlier this year,” Street said. “Conversely, small mono-line reinsurers, without


catastrophe


property- other


distinguishing attributes, remain most vulnerable to negative rating actions, through any protracted period of market price softening.” Street added that


Fitch has warned that


mergers & acquisitions (M&A) also pose many risks. “Concerning M&A, we have been very clear in voicing our concerns that further reinsurance deals face an increasing risk of failing to generate long-term value, particularly if market conditions


remain weak into 2016,” he said. For all its potential pitfalls, however, he expects


more consolidation. “M&A is a developing trend among small and mid-sized specialist reinsurers and we anticipate further deals next year, as players seek to increase their size and scale in a consolidating market,” he said. Pricing and M&A are both likely to feature


prominently in many discussions this week, Street said. He said that via discussions in Baden-Baden, Fitch will be looking to understand in more detail what ground has been conceded by reinsurers with regard to broadening terms and conditions, in exchange for smaller price reductions. “Weakening terms and conditions are less visible


to external observers but can be just as detrimental to financial strength in the medium term,” he said. He added that at a macro level, soft premium pricing conditions and low investment returns will continue to exert earnings pressure for all reinsurers, and the rating agency expects this to continue through 2016.


22 | BADEN-BADEN TODAY | DAY 1: Monday October 19 2015


19.10.15 MONDAY


On this basis, specifically in relation to the upcoming January 1, 2016 renewals, Fitch’s pricing view appears to be more bearish than the industry consensus. “We expect to see further single-digit price falls


across many sub-classes at the January 1 renewals, in contrast to reinsurers’ hopes that the overall outcome will be that prices stabilise,” Street said. “At the June and July 2015 renewals,


reinsurers appeared to take comfort from the slowing to single-digit levels for price reductions across bellwether lines including Florida wind and US nationwide. “We remain unconvinced that a price floor in


the market has yet been reached, noting that supply- side competition is expected to remain fierce.” For all the challenges, and despite sector


fundamentals being negative, Fitch’s rating outlook remains ‘stable’, with ratings being supported by strong capitalisation and the expectation that any declines in earnings will be within the ranges that current ratings can tolerate, Street said. n


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