Reinsurers have drawn blanks in their quest for new capital since the double whammy of Ike and the financial crisis. However, it could arrive later this year, suggests David Banks.
There was once a trusted formula for the reinsurance industry: suffer huge storm losses, raise premium rates, then recapitalise with the promise of healthy profits for your investors. Then along came the financial crisis.
Some of the big-money firms who did well from reinsurance suddenly found their other interests left them with nothing while those who still had money in reserve scurried to their boltholes.
As such, insurers and reinsurers have been deprived of the financial muscle that in the past allowed them to draw a line in the sand and move on.
The scarcity of capital is even more perplexing for companies that have been able to present a favourable business case – that insurance, and reinsurance in particular, tends to buck the trend more effectively than other industries in an economic downturn. However, a change could be just around the corner, analysts say. Many investment and equity firms are waiting for the right time to invest, to guarantee steeper reinsurance rate increases.
“Investors want to keep their powder dry and wait for a time when they will reap the most benefit,” says Paul Delbridge, a partner in the insurance practice at PricewaterhouseCoopers. “They want to make the most of their money.”
He says the April to June reinsurance renewals will be significant as the US property and casualty and nat-cat contracts are up for renewal at that time.
Investors will also be selective of the lines they support, as increases of 30% to 40% can be expected in nat cat, compared to 5% to 8% rate increases for European or global property.
Delbridge says while it is true that capital is scarce for other sectors, “insurance is one of the few sectors which is exhibiting growth in the top line”. However, he says the flipside is that primary insurers are reviewing the amount of reinsurance they buy.
Waiting for the most profitable time to invest has been seen before, but this year it is “more marked and more noticeable”, he says.
“New capital has been noticeably absent. We have not seen the proliferation of hedge funds. Not only that, but the retro market has not been so capitalised. In a recessionary environment, it’s one extra headache.
“That will motivate insurance companies to increase their rates. That’s true in reinsurance in particular, but the market is not going to be quite so quick to harden as people were suspecting.”
Jon Turner, head of reinsurance at Brit Insurance, says the market has found it difficult to “unlock” investment. “Some see insurance as a very illiquid investment. However, for educated insurance investors it will be a good opportunity.”
Ken Pierce, insurance and reinsurance specialist at Mayer Brown in New York, backs the view that capital could be waiting in the wings. “The capital that does exist has to find a home somewhere and the time for that investment might be in late May or early June when thoughts turn to the catastrophe market again.”
He believes there is scope for investment in start-ups, sidecars, cat bonds and recapitalisations in reinsurance. However, he will not predict how much will be invested compared to the past.
“Some investors will look at the potentially healthy returns from reinsurance capacity, whereas others will favour investment in the catastrophe products because they are uncorrelated to the markets and because they have seen large companies encounter problems.
“These things are so subjective to the psyche of the market and we are in unprecedented times. If there is market euphoria in reinsurance, there might be more recaps and start-ups.”
Neil Maidment, head of reinsurance at Beazley, says there are no signs of start-up capacity. “In addition, the hedge funds industry is going through quite a lot of change with redemptions, but it does not mean good ideas won’t be back.”
David Banks is Deputy Editor of Global Reinsurance.