ILS woes could trigger hardening in retro markets

A combination of losses in 2018, capital still trapped in relation to 2017 events and a lack of new capacity entering the market, will likely lead to a hardening of the pricing of ILS deals and higher prices in the retro market in 2019.

That is according to the December ILS market report by ILS Advisers based on the Eurekahedge ILS Advisers Index by Stefan Kräuchi and David Yao.

The report also noted that the secondary markets saw more trading take place at the end of last year as market participants sold bonds to raise cash for the renewals. This, in turn, meant that cat bond prices softened resulting in a negative price return of -1.54 percent while total return was -1.03 percent (Swiss Re Cat Bond Indices).

It also confirmed that many private ILS deals experienced significant losses, especially from aggregate contracts where limits had already been eroded due to previous nat cat events over the course of 2018.

“These losses combined with monies still trapped from 2017 and the lack of new capacity have delayed renewals and will most certainly lead to higher prices in the retro market in 2019,” the report said.

It also showed that only one the 33 funds represented in the Eurekahedge ILS Advisers Index was positive for the month. The difference between the best and the worst performing fund was 43.23 percentage points, which was higher than previous month’s figure.

Pure cat bond funds as a group were down by 1.21 percent while the subgroup of funds whose strategies include private ILS decreased by 5.51 percent. Private ILS funds underperformed pure cat bond funds by 8.20 percentage points on annualized basis year-to-date.

In terms of new issuances, one of biggest deals came from Radian Guaranty, which issued $434 million of notes to cover mortgage insurance risks. Second was a $210 million transaction for workers compensation claims resulting from California earthquakes. The expected loss was 0.14 percent while the coupon was set at the top end of price guidance at 2.2 percent, showing signs of hardening.

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