In a recent discussion during Aon’s Panel on Investments in P&C Re/Insurance Market, industry experts shed light on the absence of capital inflow into insurance and reinsurance company balance sheets during the ongoing hard market.
The panel explored the reasons behind the current trend and discussed what might need to happen for capital to return to the industry in a meaningful way.
Matthew Botein, Co-founder and Managing Partner at Gallatin Point Capital, pointed out that investors often draw lessons from their past experiences.
He highlighted historical instances, such as the excess casualty crisis of 1985-1986 and the challenges faced by companies in the wake of Hurricane Katrina in 2005. While some companies succeeded in these periods, others struggled, which has left a lasting impact on investor sentiment.
“I think a bit of the enduring lesson and overhang from that vintage of companies, was that’s a pretty tricky high wire to start up a billion dollar business, get it to $2 billion, get public in a still hard market, and get out. So I just think we’ll see fewer of those, fewer who feel they can do it,” said Botein.
As a result, he believes that investors today are more interested in targeted specialty plays, which could go public or sell, or structured investments like sidecars with a clearer path to exit.
Moderator Kelly Superczynski, Head of Capital Advisory, Reinsurance Solutions, Aon, agreed that the primary concern for potential investors is the exit, but added that Aon did expect to see a bit more capital come back in on the back of the past 18 months.
“When you look at the amount of capital that exited the insurance industry, at one point, and this is the overall insurance industry, at one point over $500 billion between mostly marked to marks on the asset portfolio, but then losses from spiking auto rates, catastrophe losses on a global basis, and all of that.
“And so, when you look at that, and I think that number’s down to kind of low four hundreds now that there’s some return to par. But when you look at that, and you look at only $10 to $15 billion having returned to the industry, it’s pretty surprising compared to recent hard markets where you saw at least 50% of loss capital kind of return back within 12 months. It is very, very different today than it was in recent hard markets,” said Superczynski.
Greg Share, Managing Director at Oaktree Capital Management L.P., noted that the current situation is different than previous hard markets due to the impact on the asset side of the balance sheet as well.
He explained that, “in other hard markets, I’m not sure they corresponded to the same loss in investors fixed income portfolios, and investors suffering significant losses in their fixed income portfolios, that potentially ties their hands a bit in terms of what they’re able to do.
“And so, it was unique that you had this hard market, which is uncorrelated to what’s going on with other things in the world, but it happened at the same time where you had, I think the biggest loss in fixed income portfolios in decades. And this year looks like the third year in a row of losses in fixed income portfolios,” said Share.
The discussion then moved to what needs to happen for capital to return to reinsurer balance sheets.
“I do think that it is returning but it’s returning in a way where there’s been a rotation of investors. And the typical Japanese pension fund or bank in a negative interest rate environment that really liked reinsurance and was participating in reinsurance type vehicles, with higher rates and an ability for them to meet their required return with less volatile fixed income securities, they’ve been rotating out,” said Share.
“Historic investors have had tough experiences over the last four or five years. And I think a new crop of investor that really understands not only the difference in price now, but the difference in terms and conditions, the difference in limits, the difference in retentions is rotating in. And so, I think we are in a cycle where certain investors are getting out and other investors are getting in,” he continued.
In terms of capital returning to the Florida market, Botein stressed that some of what had to happen has occurred, which is the state taking some pretty significant actions to improve the tort regime.
“I think, absent that it would have been very difficult to induce any capital to come in. I still think we’ll see very little capital reallocation inward by industry players, I can’t think of a public company that is likely to say, you know what, I’ve set up a deemphasised Florida for the last bunch of years, but now I’m going to go in, because I don’t think any of them want to talk about it on an earnings call,” he said.
“That’s an area where we’ll see private capital nervously, a little tepidly, but probably increasingly nonetheless, start to edge in. Some using reciprocal structures because they provide a natural pathway out through the pay down of surplus notes. Probably some with stock carriers as well. For the next couple of years, if capital comes in it’s that kind of private, opportunistic investor type, not the big balance sheets,” added Botein.
