2019 marks period of uncertainty for ILS: Appleby’s Adderley
First published in Bermuda: Re+ILS
Against a backdrop of trapped capital, issues with Markel CATCo, and two consecutive years of heavy cat losses, there is a period of uncertainty now in the insurance-linked securities (ILS) market in 2019, Brad Adderley, partner at Appleby’s Bermuda office, told Bermuda Re+ILS.
He suggested that ILS fund managers and investment bankers are struggling to raise capital. He said there had been lack of commitment for reinsurance sidecars, and not as many cat bonds being announced or quotes outstanding compared to the renewals last year.
“Everyone is failing to raise their capital,” said Adderley. “The fact there is trapped capital, there are issues with Markel CATCo, and there is disconnect. It’s the first time we have seen people struggle to raise capital, which begs the question – are we finally going to start seeing a hardening of the marketplace with all these different issues going on at the same time?”
Ratings agency Fitch stated in its Bermuda 2019 Market Update that rates could potentially increase at midyear 2019 following a capacity pullback by the ILS market.
In terms of issues at Markel CATCo, the company is currently facing pending governmental inquiries from the US and Bermuda into its loss reserves. It is one of a number of funds that has been exposed to so-called loss creep since the catastrophes in late 2017. The issue is important because many investors quickly reloaded and reinvested in the aftermath of those events, partly on the basis of those initial loss estimates.
With regard to trapped capital, Adderley suggested that the catastrophe losses from the last two years have had a “knock on effect”, and businesses losing money can’t roll the money over to the next renewal period.
As much as $20 billion of alternative capital is said to have been trapped and not deployable at the January 1, 2019 renewal, according to JLT Re’s Reinsurance Market Prospective.
JLT Re noted that 2018 did not come close to replicating 2017’s ‘great capital reload’ – although around $8 billion of new capital entered the sector in the fourth quarter of 2017, less than half was raised during the same period of 2018.
The broker suggested that capacity constraints in the retrocession market in fact dominated the narrative around the January 1 renewals. A sizeable portion of retrocession capital – a bulk of which is provided by third-party investors- was trapped for a second consecutive year due to the quantum and timing of 2018 cat losses, JLT Re said.
Adderley added that the uncertainty in the ILS market in 2019 is a culmination of the retro market changing through issues at CATCo, the two years of losses and the fact there is trapped capital.
“We have these three things happening at the same time, which is a bit unusual,” he continued. “What happens now if there are losses this year? We’re starting to see for the first time in a while some disconnect. Even worse, what happens if we see losses in the first half of the year?”
