Coronavirus-driven market dislocation is creating attractive opportunities for insurers in some lines of business, according to AM Best.
The ratings agency notes how a number of existing companies, including Beazley, Fidelis, Hiscox, Lancashire, QBE and Renaissance Re have all announced capital raising initiatives to bolster balance sheets in response to uncertainty, and to take advantage of an expected hardening market.
Initial stress testing conducted by AM Best to gauge the preliminary impact from the COVID-19 pandemic on rated insurers’ financial strength found that capital levels provide an adequate buffer against a potential shock to their balance sheets.
Overall, AM Best says insurers are likely to see a significant hit to earnings in 2020, rather than a material decline in risk-adjusted capitalisation.
However, the unprecedented impact of COVID-19 on the industry, and its effect on global economic activity, means that companies could still face credit rating pressure if market conditions deteriorate beyond prescribed scenarios.
As insurers respond to elevated claims experience and capacity constraints AM Best expects rate hardening to accelerate, at least in the short term.
AM Best has observed more business flowing to wholesale markets with favourable trends and potential opportunities particularly apparent in specialty, US excess and surplus lines and reinsurance markets.
The ease with which companies have raised equity – and the subsequent increase in share prices – likely reflects the absence of other opportunities for investors.
The low interest-rate environment has forced investors – particularly institutional investors – to look further afield for yield opportunities.
The risk and reward calculation posed by the insurance sector in a hardening market may start to look more attractive to existing and new investors, including private equity, as highlighted by the $610 million new capital injection into Starstone.
But there is also increased speculation that capital is looking to support new company formations – keen to benefit from hardening rates and terms and conditions.
While recognising that there are significant hurdles for new companies looking to establish themselves quickly to take advantage of beneficial conditions, AM says new companies benefit from clean balance sheets while being unencumbered by legacy claims.
The absence of legacy systems could also be a positive as these companies are able to use the latest technology to support, for example, the collection, processing and analysis of data.
It is noted that, over the years, AM Best has evaluated many start-ups that have not met the requirements to achieve what is considered the necessary rating commercially.
In other cases, companies have revised business plans to achieve such ratings