Capital raised (YTD) will unlikely dent the recovery the re/insurance sector has seen in pricing and improvements in terms and conditions year to date, according to a recent JP Morgan report.
At this stage, analysts believe that the capital raised YTD on a net basis totals well under $10bn.
Therefore, while broker commentary on pricing has pointed to less distressed conditions on capital, JP Morgan stated that it would be surprised if the industry ended up with a material surplus vs demand or, if surplus capital is generated, whether it would be deployed into the reinsurance space with discipline among market participants remaining strong.
Analysts said: “We estimate that about $8bn of capital has been raised YTD. On a gross basis, we believe the figure is around $10bn from catastrophe bonds, but the total size of that space has increased $3.6bn, after taking into account redemptions, which we see as a fairer way of assessing flows into the asset class.
“In the traditional industry, we believe that less than $4bn has been raised, with the headline capital raise of $1.5bn from Everest Re in late May and others that we believe did not truly increase industry capital but were used for acquisitions.”
JP Morgan has also noted that the performance of insurance linked securities (ILS) has been strong YTD in 2023. Which, according to the report, is a reflection of stronger pricing levels and a relatively benign catastrophe backdrop in 2023 YTD, especially for tail type events.
In recent weeks, issuance or capital inflows into the alternative capital space has become a key concern for the re/insurance industry, analysts have also observed.
“As we can see, catastrophe bonds have performed well and are only really triggered by tail events. Collateralised reinsurance was more of a direct competitive threat to traditional reinsurance products, in our view,” said JP Morgan.
AON data revealed that, while there has been growth in catastrophe bonds, the collateralised reinsurance space has not seen growth in recent years.
With higher returns being offered on catastrophe bonds, JP Morgan expects capital will make its way back into the alternative space via these types of instruments in the near term, rather than by collateralised reinsurance.
