It’s a measured softening, not a full pricing reversal: Sapelza, Lumen Re CUO

While the property catastrophe reinsurance market entered into a phase of measured softening in the first half of 2025, Klaus Sapelza, CUO of Lumen Re has highlighted how this is not a full pricing reversal, while also stating that maintaining strict selectivity in risks underwritten remains critical in the current environment.

For those unaware, Lumen Re is the main rated reinsurance underwriting vehicle used by specialist insurance-linked securities (ILS) investment manager LGT ILS Partners.

Sapelza remarked that the ongoing conference period serves as an opportunity to contemplate both the current and future rate environment.

“In the first half of 2025, the property catastrophe reinsurance market has transitioned into a phase of measured softening, following two years of significant rate hardening and structural reset. This was already evident in the January renewals, where risk-adjusted rate reductions of 5% to 15% were observed for non-loss-impacted programs,” commented Sapelza.

He continued: “The softening trend currently still reflects a normalization of supply and demand rather than a return to the previous soft market regime. Both traditional and alternative reinsurance capital has grown meaningfully, underpinned by strong underwriting profits in 2023-2024, and continued positive earnings momentum in 2025, despite the California Wildfires at the beginning of the year.”

The CUO noted that the Lumen Re’s strategy continues to prioritise elevated attachment points, stricter contractual terms, and selective counterparty engagement, particularly for frequency covers and loss-impacted programs.

“This approach has supported the technical return levels of our reinsurance portfolio, helping offset the gradual erosion in headline rates, hence our characterization of measured softening, rather than a full pricing reversal,” Sapelza said.

Turning attention to capital allocation, Sapelza highlighted the pivotal role of catastrophe bonds in restoring balance to the market.

“The first half of 2025 saw record cat bond issuances, with volumes exceeding previous highs and strong participation from global investors, including a notable increase in capital from European private wealth platforms via UCITS strategies,” the CUO said.

As we’ve previously reported, insurance-linked securities (ILS) market capacity is at an all-time high and projected to end 2025 by having grown to around US $114 billion, with the catastrophe bond market being the largest component of this.

Artemis’ data shows that total cat bond and related ILS issuance in just the first six months of 2025 almost broke the annual record set in 2024 of $17.7 billion, while new annual records were set for 144A property cat bond and total 144A cat bond and related ILS issuance.

However, the total cat bond issuance record was broken soon after July 1st and at $18.4 billion at the time of writing, according to Artemis’ data, is on track to hit and exceed the $20 billion mark.

“Performance across cat bond portfolios has also been strong, delivering mid-teen total returns over the past 12 months, though we would caution that over recent months, a significant portion of this has been driven by mark-to-market gains. These gains stem from the compression in primary and secondary market spreads, as the elevated levels seen in 2023 and 2024 have corrected sharply due to inflows and benign loss experience,” Sapelza added.

“Indeed, our analysis shows that pricing for new cat bond deals is now back at 2021 and 2022 levels, marking a notable decline from the wide spreads seen just 12-18 months ago. While still attractive relative to long-term averages, this softening in cat bond spreads has outpaced the rate declines seen in traditional reinsurance, leading to a relative shift in value.”

Sapelza also notes that Lumen Re currently observes that traditional reinsurance layers offer risk-adjusted returns 15%–20% higher than comparable cat bond placements.

“This makes it particularly attractive for semi-liquid ILS funds like those managed by LGT ILS with Lumen Re acting as fronter, where around 60% of capital is allocated to reinsurance deals with stronger technical margins, offering better value than pure cat bond strategies,” the CUO noted.

In spite of this encouraging environment, Sapelza stressed Lumen Re remains cautious in its forward allocation.

“Climate volatility, geopolitical instability, and macroeconomic uncertainty all represent significant tail risks that could impact performance in the remainder of 2025 and beyond. While underwriting results were buoyed by a relatively quiet second quarter, the first quarter wildfires in California serve as a reminder of the frequency and unpredictability of emerging perils,” the CUO explained.

Sapelza continued: “As we look toward the 1 January 2026 renewals, our approach remains selective. We continue to differentiate strongly between cedents based on transparency, historical performance, and strategic alignment with our portfolio objectives. Risk selection and structuring will remain paramount as softening persists, but elevated attachments and enhanced terms – along with steady investor appetite – should provide continued support for underwriting discipline,”

Concluding: “In summary, we believe the current market reflects a healthy, though more competitive, landscape for capital allocators. The pricing tailwind has moderated, but disciplined structuring, strong portfolio curation, and proactive capital deployment continue to offer compelling risk-adjusted return opportunities – both in traditional reinsurance and cat bonds, depending on market conditions and investor liquidity preferences.”

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