ILS capacity decline an opportunity for cat bond investors: Plenum

Analysts at independent ILS investment manager Plenum Investments have suggested that a recent shrinking of insurance-linked securities (ILS) capacity could represent an opportunity for cat bond investors.

In a report reflecting on the January reinsurance renewal period, Plenum Investments noted that the total catastrophe bond market declined by around $800 million.

But Rötger Franz, a Partner, Portfolio Manager and Senior Insurance Analyst at Plenum, writes that this could be to the benefit of investors, who now have the prospect of very attractive market conditions without facing trapping of collateral.

Plenum cited the recent Hannover Re data that estimates trapped collateral for collateralized and private ILS transactions still amounted to between $5 billion and $10 billion at the end of last year.

However, the moderate shrinking of the cat bond market and soaring reinsurance rates also meant that cedents increased their retentions significantly in order to save reinsurance cost at Jan 1, which in Plenum’s view suggests that the pricing cycle could be approaching its peak.

“Market conditions in the reinsurance market are now the most attractive in a generation,” Franz asserted.

“The hard market meets a reinsurance sector with plenty of excess capital waiting to be deployed into underwriting, analysts wrote, adding that all four of the major reinsurers have substantial excess capital and Solvency II ratios are well above their minimum targets despite a series of events last year.”

In particular, Franz notes that rates in property catastrophe business have skyrocketed since Hurricane Ian as reinsurers attempt to recover their losses, with terms and conditions having also improved significantly.

Likewise, cancellations and restructurings of reinsurance programs tended to be relatively high as re/insurers used the hard market as an opportunity to actively re-underwrite their portfolios.

But supply and demand remains imbalanced, with less capital deployed into property reinsurance overall during the renewals, meaning there are potential gaps to be filled, presenting opportunities to the cat bond investment community.

“The reinsurance sector has substantial excess capital to deploy but we note that most issuers remain on the cautious side maintaining some excess capital in uncertain times,” Franz continued.

Looking ahead, Plenum expects the reinsurance sector will remain in a strong capital position, with an already favourable environment likely to reinforced further as the year progresses.