The insurance sector will remain attractive to investors in the first half of 2019, and there are "clear signs of momentum" in how natural catastrophe risk is priced in the equity and ILS markets in the wake of two recent heavy loss years, according to insurance investment manager Twelve Capital.
In Twelve Capital's H1 2019 outlook, the company suggested that capital markets are increasingly willing to invest in a wider scope of insurance risk.
As a result, the firm believes this raises material challenges for incumbents such as a reinsurers and specialty lines insurers into rethinking their business models and how to remain relevant in a more competitive environment, and considering more consolidation.
In the short-term, however, Twelve Capital has acknowledged that there has been a pause in capital markets' expansion into insurance, reflecting disappointing returns some investors have seen over the past two years from investments in ILS.
European, Bermuda and Lloyd's reinsurers all saw an active third and fourth quarter in 2018, particularly due to Atlantic hurricanes, Pacific typhoons and California wildfires, leading to an above-average year for natural catastrophes, Twelve Capital noted.
As a result of this, increases n reinsurance rates have been modest, however Twelve Capital expects rate to increase when reinsurance contracts from Japan and Florida renew later in the year.
Furthermore, retrocession rates have increased, particularly on loss-impacted business. This increase has varied on the riskiness of the transaction, with riskier transactions resulting in more significant increases.
Twelve Capital's private ILS strategy at the January renewals was on retrocession business, and is where it said it saw the most attractive compensation for the type of risk that is selected.
In Twelve Capital’s view, 2018 ended with unusual pricing behaviour in the cat bond market.
“While cat bonds normally trade at a premium after the hurricane season ends, in 2018, intense selling pressure towards year-end was noted which led to significant spread widening. Twelve Capital believes this selling pressure stemmed from managers struggling to generate liquidity for the upcoming January renewals,” the report said.
Twelve Capital suggested spread-widening represents an attractive entry point into the cat bond market, however it expects the current opportunity to dissipate once renewals are fully settled.
Twelve Capital, Report, ILS, Bermuda, Europe