Analysts at KBW have concluded that it remains too early to be concerned about recent capital raises across the re/insurance industry, despite some commentators’ unease about how long hard market conditions can last.
RenRe and Lancashire are among the latest re/insurers to undertake major capital raises in a bid to take advantage of the improved pricing environment, triggered in part by the COVID-19 pandemic.
Data from Hyperion X Analytics shows that June 1 property cat reinsurance pricing rose by 26.1% on a risk-adjusted basis, representing the biggest increase since 2002 and the highest rate-on-line on line since 2012.
On top of the prior dynamic of cumulative price reductions, rising severity and unmodelled losses, COVID-19 has added asset and liability impacts and a tighter trapping of third party reinsurance/retro capacity as collateralised vehicles account for 75-80% of the total retro market.
Additionally, there are strong expectations for the July 1 renewal, with property cat predicted to be up by 5-15%, US wind up by high single-digits and retrocession up another 20-25% on the January renewal.
On the casualty side, some D&O and E&O rates are reported to be +70-100% and casualty reinsurance up by double-digits.
Including the equity raises of $354m by Lancashire and $610m by StarStone last week, the total raised by US reinsurance and specialty insurance companies in recent weeks amounts to $4.4 billion.
There are the also various plans rumoured to be underway, including at ARK, Richard Watson, and Iordanou, which indicate another $3-4 billion could be raised over the next couple of months, according to KBW.
This means small and midsized re/insurers could have raised around $10 billion by the end of the year, with additional opportunities for under-levered companies to issue debt (including cat bonds) for growth or use less reinsurance.
Analysts do not currently expect larger reinsurance an specialty players to raise capital, although it is thought that they will mostly reallocate capital towards the improved pricing.
However, while the capital coming in is substantial, KBW warned that it is still dwarfed by the scale of virus losses, with Lloyd’s estimating that COVID-19 will cost the global industry around $200 billion, made up of $107 billion of underwriting losses and $96 billion of investment losses.
“Less than half of the C-19 loss will be reinsurance of course but the overall arithmetic suggests it would take major external capital raises by the large companies to put any dampener on pricing momentum,” the firm concluded.
