Whereas the property disaster reinsurance market entered right into a section of measured softening within the first half of 2025, Klaus Sapelza, CUO of Lumen Re has highlighted how this isn’t a full pricing reversal, whereas additionally stating that sustaining strict selectivity in dangers underwritten stays vital within the present atmosphere.
For these unaware, Lumen Re is the primary rated reinsurance underwriting automobile utilized by specialist insurance-linked securities (ILS) funding supervisor LGT ILS Companions.
Sapelza remarked that the continuing convention interval serves as a chance to ponder each the present and future charge atmosphere.
“Within the first half of 2025, the property disaster reinsurance market has transitioned right into a section of measured softening, following two years of serious charge hardening and structural reset. This was already evident within the January renewals, the place risk-adjusted charge reductions of 5% to fifteen% had been noticed for non-loss-impacted applications,” commented Sapelza.
He continued: “The softening pattern presently nonetheless displays a normalization of provide and demand fairly than a return to the earlier tender market regime. Each conventional and different reinsurance capital has grown meaningfully, underpinned by robust underwriting earnings in 2023-2024, and continued optimistic earnings momentum in 2025, regardless of the California Wildfires at first of the yr.”
The CUO famous that the Lumen Re’s technique continues to prioritise elevated attachment factors, stricter contractual phrases, and selective counterparty engagement, significantly for frequency covers and loss-impacted applications.
“This method has supported the technical return ranges of our reinsurance portfolio, serving to offset the gradual erosion in headline charges, therefore our characterization of measured softening, fairly than a full pricing reversal,” Sapelza stated.
Turning consideration to capital allocation, Sapelza highlighted the pivotal position of disaster bonds in restoring steadiness to the market.
“The primary half of 2025 noticed file cat bond issuances, with volumes exceeding earlier highs and powerful participation from world buyers, together with a notable improve in capital from European personal wealth platforms by way of UCITS methods,” the CUO stated.
As we’ve beforehand reported, insurance-linked securities (ILS) market capability is at an all-time excessive and projected to finish 2025 by having grown to round US $114 billion, with the disaster bond market being the biggest element of this.
Artemis’ information exhibits that complete cat bond and associated ILS issuance in simply the primary six months of 2025 nearly broke the annual file set in 2024 of $17.7 billion, whereas new annual data had been set for 144A property cat bond and complete 144A cat bond and associated ILS issuance.
Nevertheless, the entire cat bond issuance file was damaged quickly after July 1st and at $18.4 billion on the time of writing, in accordance with Artemis’ information, is on monitor to hit and exceed the $20 billion mark.
“Efficiency throughout cat bond portfolios has additionally been robust, delivering mid-teen complete returns over the previous 12 months, although we’d warning that over latest months, a good portion of this has been pushed by mark-to-market good points. These good points stem from the compression in main and secondary market spreads, because the elevated ranges seen in 2023 and 2024 have corrected sharply because of inflows and benign loss expertise,” Sapelza added.
“Certainly, our evaluation exhibits that pricing for brand new cat bond offers is now again at 2021 and 2022 ranges, marking a notable decline from the vast spreads seen simply 12-18 months in the past. Whereas nonetheless enticing relative to long-term averages, this softening in cat bond spreads has outpaced the speed declines seen in conventional reinsurance, resulting in a relative shift in worth.”
Sapelza additionally notes that Lumen Re presently observes that conventional reinsurance layers supply risk-adjusted returns 15%–20% greater than comparable cat bond placements.
“This makes it significantly enticing for semi-liquid ILS funds like these managed by LGT ILS with Lumen Re performing as fronter, the place round 60% of capital is allotted to reinsurance offers with stronger technical margins, providing higher worth than pure cat bond methods,” the CUO famous.
Regardless of this encouraging atmosphere, Sapelza careworn Lumen Re stays cautious in its ahead allocation.
“Local weather volatility, geopolitical instability, and macroeconomic uncertainty all symbolize important tail dangers that might impression efficiency within the the rest of 2025 and past. Whereas underwriting outcomes had been buoyed by a comparatively quiet second quarter, the primary quarter wildfires in California function a reminder of the frequency and unpredictability of rising perils,” the CUO defined.
Sapelza continued: “As we glance towards the 1 January 2026 renewals, our method stays selective. We proceed to distinguish strongly between cedents primarily based on transparency, historic efficiency, and strategic alignment with our portfolio goals. Danger choice and structuring will stay paramount as softening persists, however elevated attachments and enhanced phrases – together with regular investor urge for food – ought to present continued assist for underwriting self-discipline,”
Concluding: “In abstract, we imagine the present market displays a wholesome, although extra aggressive, panorama for capital allocators. The pricing tailwind has moderated, however disciplined structuring, robust portfolio curation, and proactive capital deployment proceed to supply compelling risk-adjusted return alternatives – each in conventional reinsurance and cat bonds, relying on market circumstances and investor liquidity preferences.”
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