Capital raising and cold feet: an advisor’s view on the hardening market

This is an exceptionally busy period for capital raising but there’s a lack of appetite for new reinsurers, TigerRisk president Rob Bredahl told APCIA Today.

As the re/insurance market grapples with a period of significant losses and rates harden as a result, investors are once again eyeing the re/insurance industry as potential investment opportunity.

A combination of factors including questions around the validity of models, the unknown of climate change and the phenomenon of trapped capital mean that investors are more cautious than at this stage in previous cycles. But new money is, nevertheless, flowing into the industry.

As president of TigerRisk Partners and ultimately responsible for TigerRisk Capital Markets and Advisory (TCMA), Rob Bredahl is at the heart of this dynamic, speaking to investors globally. He estimates that, thus far, roughly $6 billion of new capital has entered the industry via existing companies and a further $5 billion could still enter the fray via startups.

Bredahl says the group’s pipeline has never been so busy—it is just a question of how many deals get over the line now and in what form.

“It’s capital raises in all forms,” he said. “We have startups and ramp-ups, several different forms of sidecars—a run-off sidecar, a retro sidecar, and traditional reinsurance sidecars—so it’s going to be a busy few months.

“Because we have a variety of capital raises, we are talking to just about every investor on the planet that will invest in insurance and reinsurance.

“Almost all of them are staying away from pure startups, especially reinsurance company startups. They don’t think market conditions will be good enough or last long enough to create franchise value, so ramp-ups are easier to get done, whereas sidecars are a trade where you invest in a sidecar and it self-liquidates.

“It’s different from other cycles I’ve been through where there were a lot of pure startups—we’re not seeing a lot of those this time.”

Bredahl was speaking on Intelligent Insurer’s Re/insurance Lounge, an online platform where interviews and panel discussions are held live on a weekly basis and content is available on demand at any time to members.

TigerRisk Markets and Advisory Group was formed in 2015 and has grown to a 23-person dedicated investment banking team looking only at insurance and reinsurance—including insurance-linked securities (ILS), all forms of cat bonds and sidecars, capital raising and mergers and acquisitions (M&A) advice. In the past five years it has completed approaching 60 deals.

When it comes to raising money for traditional ILS funds, recent loses and trapped capital have taken their toll, along with worries about COVID-19 losses seeping into those portfolios. Because of this, Bredahl predicts that the ILS market is unlikely to grow this year—and because of the trapped capital, useable collateral may drop.

“Investors are interested in the run-off space and retro—the hardest segment of the market where they can be opportunistic and get in and get out very quickly,” he said.

Coping with the present
Bredahl believes the market is still coming to grips with the ultimate COVID-19 losses, combined with a cluster of cat events, very low interest rates and a change in federal policy that will mean interest rates will stay low for the foreseeable future.

“If you wrap that up, I think the hardening market needs to continue to harden for the next couple of years,” he said. “I’m happy that the market is functioning, but I think there’s a lot more pain to come.”

Looking at the reinsurance sector, he noted that reinsurers are being assertive when it comes to rates.

“They are very quick to say ‘we have capacity, we want the right deals, we want to grow as long as we get that rate’, and that feels very different from the last two hard market cycles,” he said.

“Will they remain disciplined, will they stick to their guns, will they wait until the market comes to their price thresholds? We’ll see. Our job as brokers is to get them to write business before they get to their price thresholds.”

From the cedants’ perspective, Bredahl sees a willingness to accept that rates need to change.

“Generally they are understanding,” he said. “One of the key messages is ‘don’t try to do it all at once’.

“Especially for the admitted companies—they can’t get the rate all that quickly so don’t leave them hanging, do it over several years.

“It’s easier to understand why reinsurers need more rate: results have been horrible in the last three or four years.”

Asked for his wider view on the market, Bredahl noted that there are pockets of consolidation, particularly where there are troubled companies.

“The Florida homeowners market stands out; I expect a number of companies to be sold,” he said. “While I expect a fair amount of consolidation in Florida, outside of that I don’t see a lot.”

He noted that there is a lot of activity around Lloyd’s, as there has been for the last couple of years.

“Lloyd’s has a rating, they take back tail risk—it’s a good spot to start a new company so we are advising two different entities on buying Lloyd’s companies and a couple of different capital raises.”

He highlighted Bermuda as another key area of activity.

“Despite the tax law changes in the US, Bermuda is still the best locale for forming cat writers so we have a couple of projects involving Bermuda balance sheets, and we have a number of M&A deals, some managing general agents, and some smaller companies—quite a mix of activities,” he said.

Looking ahead
Looking to the future, Bredahl noted that the COVID-19 “new normal” creates concerns about new business.

“I’ve found it’s easy to maintain relationships and complete deals with people you know well but it’s very difficult to start completely new relationships,” he said.

“I’m concerned about what it means for us, looking ahead a couple of years, if we are stuck talking to people on video. Can we create relationships with the strength where a buyer would trust us with something as important as a reinsurance programme?

“So far, our travel and entertainment expenses are down, and we are covering a lot of ground with video. It all seems more efficient, but the relationship building is crucial to brokers and I worry about that over time,” he concluded.

To watch the full video interview on which this write-up is based, click here and visit Intelligent Insurer’s Re/insurance Lounge