After two years of price decreases averaging 15 percent on U.S. property catastrophe placements, risk-adjusted pricing moderated at the most recent June renewals.
Reinsurance broker Guy Carpenter & Co. reported that the price declines are averaging in the high single digits, depending upon companies’ individual renewal characteristics.
Guy Carpenter said the moderation is due to a combination of factors, including pricing pressure created by past seasons of price declines and a significant amount of new limit placed.
“Many reinsurers held the line against more extreme declines even though capacity was still plentiful and low loss experience continued,” said Lara Mowery, global head of Property Specialty, Guy Carpenter.
Mowery said there has been some firming in the industry loss warranties (ILW) market with demand increasing.
Also, she said that while mid-year has not been a core date for retrocession renewals, “there has been a significant amount of activity in this marketplace as buyers sought to offset their catastrophe exposures.”
Two years of decreased pricing along with a healthier insurance environment in Florida contributed to the uptick in the demand for reinsurance.This was fueled, in part, by insurance companies’ desires to enhance their risk management structures.
A significant number of risks transferred out of the Florida Citizens Property Insurance Corp. into the private sector in the past 18 months and a continued reduction in policy count for some larger regional and nationwide carriers also contributed to increased demand for coverage.
The report noted that this was also the first renewal season in several years that the Florida Hurricane Catastrophe Fund (FHCF) had no outstanding post-event bonds, allowing companies to reduce their FHCF coverage and explore private market alternatives. Additionally, this was the first time in history the FHCF purchased reinsurance. The combination of these factors led to a material increase in new Florida exposed reinsurance limit being purchased, according to Guy Carpenter.
“Several factors contributed to a notable increase in the amount of limit placed at June 1 this year using much of the excess capacity that has been present in the Florida market over the past couple of renewals,” commented George Carse, managing director and Head of the Tampa Office at Guy Carpenter. “Reinsurers focused significant support on accounts where they have maintained long-standing relationships and met our new business capacity needs with competitive pricing by the June 1 renewal date.”
The high volume of maturities coupled with a diverse and steady stream of new issuances created a dynamic catastrophe bond market in the first quarter of 2015. There was $1.49 billion of 144A P&C catastrophe bond limit successfully placed with investors, the most first quarter volume in history.
Furthermore, the highest quarterly volume of 144A P&C cat bonds matured in the first quarter, returning $3.544 billion of principal to investors. Through June 1, 2015 issuance stood at $3.62 billion.
As of June 1, 2015, $21.83 billion of P&C 144A catastrophe bond risk capital was outstanding.
Investors’ pricing discipline that emerged in the fourth quarter of 2014 persisted into the first quarter of 2015 as recent deal pricing and investor feedback suggested that further catastrophe bond pricing reductions in the near-term would be unlikely. The market has currently reached a stabilization point, the data suggests.
Guy Carpenter brokers also said that retrocessional pricing continued to soften over the first half of 2015, with plentiful capacity from both “funds” and rated carriers remaining the defining feature of the market. They said that this year the continued decline in pricing and the increased availability of innovative products and new levels of cover has meant that many buyers sought additional purchases at June 1. Increased purchasing activity in certain sectors has led to some recent firming in this space.
Seasonal outlook providers expect 2015 basin counts to fall below the long-term mean of 1955- 2014. The expected counts also fall clearly below the short-term 1995-2014 mean. So while this indeed may be a quiet year, the northern Gulf and northern Caribbean remain areas to watch closely.