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Tight ILS pricing strains Florida renewal

Tumbling cat bond prices continue to exert pressure on the wider reinsurance market and are likely to curb rate increases at the upcoming Florida renewal.

With a clear picture on mid-year rates yet to emerge, some of the insurance-linked securities (ILS) benchmarks set amid a muted April renewal will raise questions over how much of a pricing reaction to Hurricane Irma losses may be achievable.

On the other hand, underwriters are pointing to jitters over whether Irma losses will track higher as a factor that may support a level of re-rating, and potentially impact negotiations over collateral release.

However, having raised significant capital since last year's losses, ILS funds are in a strong position to seek an expanded market share at the mid-year renewals.

One broker said that ILS manager tactics for growth were diverging: some were focused on expanding participations on favoured accounts, while others were looking for the opportunity to get onto new programmes.

This year there may be more focus on the outcome of pre-season cat bonds, but sponsors using the ILS market to create pricing tension is nothing new.

"[Cat bond] pricing benchmarks are not going to make it easy on the traditional market to extract rate increases," one ILS executive noted, adding that the exceptions would be loss-hit business or reinsurance layers that did not attract ILS writers.

A handful of carriers that have turned to the market have been able to get cover at levels that compare favourably to pre-HIM issuances.

One of the notable deals issued in the run up to the hurricane season was Safepoint's Manatee Re bond.

Despite the insurer being set to make a small recovery from a 2017 cat bond layer, it was ultimately able to upsize the largest layer of this year's deal from $125mn to $160mn at an insurance coupon of 4.25 percent.

UPC Insurance also returned to the cat bond market this year, raising interest in its new Armor Re bond at levels well below its pricing expectation.


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