From Artemis:
Growing cat bond market a credit negative for reinsurers: Moody’s
The growing size of the catastrophe bond market, which at around $20 billion of risk capital outstanding has reached its largest size ever, is a credit negative factor the outlook of reinsurers, according to a report from ratings agency Moody’s.
The size of the catastrophe bond market, which has grown in outright terms by nearly $3.5 billion or approximately 20% in just one year, shows the increasing interest that capital market investors have in participating in catastrophe reinsurance business.
As interest among investors continues to grow, the share of the global property catastrophe reinsurance market which is financed by third-party capital increases and this trend is now taking away core reinsurance business opportunities from traditional reinsurers. As investors get a taste for new lines of business and new layers of risk, while the market adapts and innovates to support these tastes, the outlook for reinsurers looks pessimistic.
At the end of 2013 the outstanding catastrophe bond market will reach the largest size in its 16 or so year history. In a report published yesterday, Moody’s puts the expected size of the market a year-end at just under $20 billion. However, since the Moody’s report was written we now have two more deals bringing another $500m or more of risk capital, so over $20 billion now seems more likely.
Moody’s says that the expansion of the asset class, driven by continued demand from hedge funds, pension funds and other institutional investors who have embraced catastrophe risk and reinsurance as an asset class for return and diversification benefits, looks likely to continue for the forseeable future.
Moody’s says that this is credit negative for reinsurance companies, as catastrophe bonds create competition for traditional reinsurance and the cat bond market is increasingly making efforts to widen peril coverage and terms across a range of geographies and risk categories.
Moody’s said that the increasing volume of cat bonds issued and outstanding is generally credit negative for reinsurers, as insurance-linked securities (ILS) compete directly with traditional reinsurance products. This has resulted in core areas of catastrophe reinsurance programs being taken by capital market investors, while traditional reinsurers have been forced to look elsewhere for opportunities, in some cases diversifying away from catastrophe risks....MUCH MORE
