The flurry of meaningful capital raises in the reinsurance industry in the aftermath of the COVID-19 outbreak are not expected to hinder current favourable market conditions, according to analysis by Fitch Ratings.
In Fitch’s universe of global reinsurers, a combined $10.3 billion of capital has been raised since March 2020 as firms look to shore up balance sheets in light of the pandemic, and take advantage of a hardening marketplace.
According to Fitch, of the total, common equity accounts for around $2 billion and preferred equity roughly $0.6 billion, with various debt securities accounting for $6.4 billion, and drawdowns on credit facilities the remaining $1.35 billion.
Of this total, Fitch estimates that $3.5 billion is for retirement or repayment of debt, with the remaining funds mostly raised to take advantage of hardening market conditions, provide financial flexibility, and for some, to bolster depleted capital levels.
Some of the notable capital raises since the COVID-19 outbreak include Fidelis, QBE, Hiscox, Beazley, Lancashire, RenRe, and IRB Brasil Re.
“These capital raises are not expected to significantly dampen the favourable market conditions, as the hardening market is not being driven by capacity concerns and the added supply is generally from disciplined sources,” says Fitch.
Prior to the pandemic, reinsurance pricing had been trending in a more favourable manner following a prolonged softened market state, and on the back of consecutive heavy loss years.
There’s an expectation across the market that COVID-19 serves to both intensify and accelerate reinsurance price increases, while the impacts of Hurricane Laura and the active California wildfire season look set to drive additional momentum as the market heads towards the important January 1st, 2021 renewals.
Historically, significant disruption in the global reinsurance industry has resulted in a flurry of startups, as was the case after 9/11 and also in the wake of the global financial crisis in 2008. In the aftermath of the current crisis, however, Fitch does not expect to see a “big wave of new start-up companies or many additional scale-ups,” noting that actual capital raised has “lagged behind the expansion of existing companies.”
The ratings agency adds that it views start-ups as more challenging that scaling up existing platforms that already have the necessary licenses and regulatory approvals. However, one benefit of a new company is the clean balance sheet and lack of legacy issues or reserves, which, in a post-COVID-19 world, could prove valuable.
Fitch highlights Convex Group as one of the new start-ups that has a head start on any newer company owing to its founders being Stephen Catlin and Paul Brand. We spoke with the firm’s founders towards the end of last year, when the company underlined the benefits of having no legacy issues and leveraging advanced technology.
