Reinsurance broker Guy Carpenter and global ratings agency AM Best have jointly estimated that the total global dedicated reinsurance industry capital hit US$531 billion (CA$672.6 billion) by mid-year 2021, marking an increase of approximately 2.8% from year-end 2020. Traditional reinsurance capital has increased from US$429 billion to US$441 billion, or approximately 2.7%, while alternative capital has increased from US$88 billion to US$91 billion, or about 3.5%, in the same six-month period.
“There was new capital formation activity after the COVID outbreak last year, and there has been favourable premium growth in the investment environment this year,” said Shiv Kumar (pictured), president of GC Securities, the capital solutions unit at Guy Carpenter. “There is now increasing clarity around COVID exposures, and the industry [has] enjoyed diversification and skill benefits.
“These dynamics have resulted in the reinsurance industry being healthy from a capital perspective, despite the fact that major loss activity in the first half of 2021 was at a 10 year high due to higher than average losses in the US and Europe. In fact, excess capital build and recovery in valuations is now leading to a rebound in dialogues about strategic and transformational deals.”
Brian Schneider, senior director of insurance ratings at Fitch Ratings, described the capital outlook for the global reinsurance industry as being “at a very strong point,” adding that capital has been trending in a positive direction for some time. That has enabled the industry to “withstand a lot of the unusual losses” it has seen, according to Schneider, particularly in recent years.
“Traditional capital still dominates the picture,” said Schneider. “It provides [approximately] 85% of the current reinsurance market capacity, and this level is really unchanged very much since 2015. But […] we did see some alternative capital growth in the first quarter. [According to Aon’s Reinsurance Market Outlook Update], alternative capital grew by US$2 billion to US$96 billion in Q121. This follows declines in 2019 and 2020 when investors retreated a bit from alternative capital due to issues surrounding loss creep and some of the trapped ILS capital that was happening following some of the major catastrophe events in 2017 and 2018.”
Alternative capital in the reinsurance market is something that Kumar and the GC Securities team monitors very closely because it provides a good portion of the global industry’s retrocessional capacity, which consequently has an impact on the broader availability of reinsurance.
As of mid-year 2021, Kumar’s team estimates that approximately US$32 billion, or 35% of alterative capital, was allocated to Rule 144A catastrophe bonds, which are typically the more liquid type of cat bond deals and apply to the resale of securities. A further US$11.5 billion dollars, or 13%, was allocated to collateralized quota shares or sidecars, and the remaining US$47 billion was deployed towards non-proportional, collateralized reinsurance or retrocession.
“The sidecar or production market has actually grown despite past challenges of surprise losses, loss creep, and collateral trapping,” Kumar remarked. “The increased allocation has mainly come through direct bilateral arrangements with foundational investors rather than through syndicated placements with dedicated ILS funds. In these arrangements, there is a keen differentiation across cedents based on their past underwriting experience, loss reporting, and collateral release prompts. Beside pressure on structural terms and conditions, there is a real focus on the override. Demand for this capacity is currently outpacing supply.
“The 144A cat bond market is on track to have a record issuance this year. In the first six months of 2021, we saw US$7.9 billion in new bond issuance via 27 unique transactions for 26 different sponsors. First-time bond sponsors included reinsurers, domestic carriers, as well as mutuals and corporates. […] A growing number of reinsurers is exploring this market as an efficient substitute for retrocession capacity through aggregate industry index-based structures.”
As for the non-proportional, collateralized reinsurance markets, Kumar said they have increased their use of rated fronts to make it easier to participate on programs, and they’re also focusing more on contract language, coverage and exclusions, and timely loss reporting issues.
Schneider said the catastrophe bond market has seen “some very good momentum,” generally experiencing lower losses than collateralized reinsurance, which continues to be the dominant form of alternative reinsurance capital.
“Cat bonds remain a very attractive investment proposition for investors, as risk adjusted returns are still pretty decent for this classification and then, of course, the diversification benefit is a big push for this asset class,” said Schneider. “Also, global reinsurers continue to sponsor cat bonds, which I think is good for the market. We saw transactions in the first half of 2021 from Everest Re, Ren Re, Aspen, Ariel Re, as well as the new start-up company Vantage. So it continues to be a good source of risk management for reinsurers as well.”
Alternative capital has also started to pick up environmental, social and governance (ESG) credentials, Kumar added, which are in high demand from asset managers in many countries around the world. The first green catastrophe bond was sponsored in 2021, and, according to Kumar, was “extremely well received by investors”. Furthermore, ESG specialist funds have now started to look at ILS as a potential investment category.
He added: “Moving forward, we expect that both traditional and alternative capital will continue to grow and evolve to support individuals, businesses and public entities who are facing increasingly complex risks in this world.”