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Retro capacity lock-up feared as 1.1 approaches

A retro market capacity crunch could emerge at the January renewals, in a delayed response to the 2017 catastrophe losses.

There are expectations that ILS capacity from several key retro writers will be static or quite possibly lower, with the 2019 renewal season set to follow a different path than this year’s renewal, sister publication Trading Risk reported.

This comes as 2018 loss events have trapped a portion of aggregate retro capital, at the same time as some investors have moved to redeem or scale back their ILS allocations in response to lower-than-expected returns.

ILS players have an outsized share in the retro market and shifting prices in this segment could force changes in US cat reinsurance pricing, given the reliance of that market on cheap retro to limit its net exposures.

In the case of Securis, sources said around half of the circa $1.5bn one-year opportunities fund launched at 1 January 2018 is expected to exit upon its maturity, with the rest moving into other strategies. 

This would put its overall assets under management – $6.7bn at the half-year – down by 5-10 percent.

Bermudian manager Aeolus is expected to have flat capacity after some of its investors scaled back, while trapped capital is also set to be an issue for Markel Catco.  

The trapped capital issue will be aggravated by the recent Californian wildfires.

Ahead of the $10bn-$15bn of losses from the fires, sources were expecting losses from the Japanese typhoons and US hurricanes to be sufficient to trap lower layers of aggregate retro programmes, even if most expected claims activity to be contained within premium income or ultimately fall short of claims triggers.

Regardless of where claims have settled at year-end, capital will be locked up because incurred claim figures can be doubled or trebled to determine how much capital buyers can freeze.

High-risk aggregate retro contracts are a minor part of the overall retro segment, but sources estimated that around 15-30 percent of ILS-backed retro capacity could be locked at year-end – possibly several billion dollars of limit – but again, this was ahead of the wildfires.

Meanwhile, the losses are expected to lock up a portion of capital for multiple pillars of the Markel Catco product, depending on buyers’ chosen cover.

Buyers can use 25 percent of their overall limit – a “pillar” of cover in the retro writer’s terminology – towards any single event and while they cannot automatically trap a full pillar upfront, claims from Typhoon Jebi, Hurricane Michael and the wildfires will impact the manager.

Markel Catco’s first pillar pay-out is largely provided by premium income, and speaking ahead of the wildfires, the firm’s Bermuda CEO Alissa Fredricks told Trading Risk that the firm expected losses and trapped collateral to remain within its premium income for the year.

Unlike last year, when fundraising activity had brought in significant capital by this point, this year it has been much more challenging for ILS managers to raise new funds to replace any trapped capital or shifting allocations. 

Not only have 2018 returns fallen below initial expectations of an improved year after Harvey, Irma and Maria, but the pain from rising Irma claims has exacerbated 2017 losses and added to disappointment for investors.

Markel Catco recognised a significant deterioration in its 2017 losses in April and other ILS managers will also have been affected by the continual increase in losses reported by Florida insurers into the second and in some cases third quarter of this year.

Some opportunistic investors that had hoped 2018 would be a harder market will now move back to waiting on the side-lines, another said.

After the experience last year, when very modest rate rises followed far more significant losses, market participants are cautious on the pricing environment at 1 January, but some positive change is possible if capacity proves to be constrained.

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