Millette: Dislocation means cat markets won’t clear at 1.1 but welcomes direction of reforms

The $20bn+ supply/demand gap for US cat will not be bridged in time for 1.1 but the broad thrust of reforms bodes well for an improved equilibrium in 2023, according to the co-founder of ILS fund manager Hudson Structured Capital Management (HSCM).

Summarising the disconnect, HSCM’s Mike Millette said: “We have less net supply from the capital markets, at best a [gentle] push from the traditional markets and we clearly have more demand.

“While on the flip side we have increased demand from buyers to contend with the impact of double-digit inflation in 2022.”

With only days before 1.1, Millette said he does not expect the cat markets to fully clear by year-end with gaps in coverage inevitable especially with US perils.

Speaking exclusively to The Insurer TV, Millette said: “We're not supposed to be talking about the European cat renewal in December. In an orderly world, the European cat renewal is supposed to start with orderly discussions in Monte Carlo, and then enter the slip stage at Baden-Baden, with FoTs being issued at the end of October, beginning of November.”

The former Goldman Sachs partner who helped pioneer the development of the ILS market after 9/11, added he had“zero expectation” the retro market will clear in an orderly way on time.

“Europe is still busy clearing and as we’re seeing big companies announcing that they're increasing their retentions, this indicates that they're not clearing the market. We're not seeing a lot of firm order items out there and we can't even give clean pricing benchmarks because of that,” he said.

As a consequence, Millette predicts the 1.1 retro market will still be working weeks after the 1 January.

“We saw retro contracts being completed in February,” he said. “This year, [Hurricane] Ian was worse than Ida and I expect we'll see the same.”

But Millette was more optimistic that the cat markets was reacting rationally to find a new equilibrium, referring to a “three-step programme” that is currently taking place.

The first is the scale of proposed reforms taking place in Florida, the home of much (re)insurer misery over the past five years.

Florida = “straw that broke the camel's back”

Noting the extraordinary statistic that the sunshine state is responsible for around three-quarters of all of the legal costs associated with US homeowners claims but only 9 percent of homeowner claims, he claims it was the state’s aggressive legal culture that was the “straw that broke the camel's back”.

Last week, the Florida state of representatives approved a basket of reforms including eliminating one-way attorney fees and the state’s controversial assignment of benefits (AoB) right.

The second and third aspect of the cat markets re-setting is focussed around retentions and price/terms.

“So, we had that famous discussion from Swiss Re around its "double-double-half" program - ‘we're going to double the retentions, double our price and cut our ceding commissions in half’. And now we're seeing real world evidence of increasing retentions with a number of different major carriers increasing their retention by six figures,” Millette explained.

Last month, The Insurer revealed that Liberty Mutual is pulling the first $500mn cat XoL layer while looking to buy more on the top while Axa XL has withdrawn a €250mn layer at the bottom of its NA hurricane XoL tower.

“So, that's actually interesting,” he said. “That's good, because that means they're eating more of their cooking. That means they're going to prepare the meal a little bit more. What enters the reinsurance market is going to be higher up and more curated, which means in turn that what enters the retro market will be higher up and more curated,” he continued.

Finally, or “the third leg of the stool”, is price and terms.

“We're seeing evidence of that of all places in the cat bond market,” explained Millette. “We are seeing radical increases in price, increases 50 percent plus, from comparable tranches issued last year and issued this year with also changes in terms that are very noteworthy.”

“We're seeing charges for extension, trapped capital, which is good because trapped capital can't be free for people that are expected to bring home a return on that capital for their investors every day of the week.”

He also acknowledged changes were taking place around named perils vs all risks coverage.

“I've told my children that if they ever…use the words ‘including but not limited to’ that people will wonder about them. I think that ‘including but not limited to’ language was a product of eleven years of peace in the ocean”.

Millette continued by saying that at a consequence of “six years of storms in the ocean is…named perils”.

“We're seeing all sorts of announcements in the market that different carriers, different funds will only be doing named peril coverage”, he concluded.

Watch the 20-minute video interview with HSCM’s Mike Millette to hear his analysis of:

  • Florida reforms
  • Named perils vs all risks
  • Impact of cat crunch on non-cat lines
  • Behaviour of ILS/ILW markets

HSCM Disclosure:

The views expressed reflect the current views of Hudson Structured Capital Management Ltd. (“HSCM”) as of the date hereof and HSCM undertakes no responsibility to advise you of any changes. Neither the interview nor any of the information contained herein constitutes an offer to sell, or a solicitation of an offer to buy, any security or instrument in or to participate in any trading strategy or investment vehicle. Past performance is not indicative of future results. There can be no assurance that any objectives can be achieved or are realistic in any given market condition.