Alternative capital in the reinsurance sector has fallen but will rebound, says S&P Global Ratings

The influx of alternative capital into the reinsurance industry has slowed recently, but is likely to pick up again, according to S&P Global Ratings.

Global reinsurance capital stood at $605 billion at the end of Q1 2019, with alternative capital accounting for $93 billion of that total, or 15 percent of global reinsurance capital, according to Aon data. That compared with 17 percent at the end of 2018, when alternative capital represented $97 billion of $585 billion of global reinsurance capital.

Disappointing performance in 2017 and 2018 accounts for some of this decline. Last year the global reinsurance sector generated a return on capital (RoC) of only 3 percent, despite having a cost of capital (CoC) of 7.6 percent—a second consecutive year of subpar returns.

Speaking in a webinar ahead of the Monte Carlo Rendez-Vous, Taoufik Gharib, senior director and sector specialist for insurance ratings in North America at S&P Global Ratings, argued this performance will have driven out more opportunistic investors such as hedge funds and private equity, leaving more strategic pension funds.

“They take longer to commit capital but once they do they commit for longer,” he said.

While overall alternative capital allocations have declined, there has also been a flight to quality that has made the impact uneven. For example, RenaissanceRe raised $700 million in alternative capital this year, despite the broader trend of reduced allocations.

As re/insurers compete to attract alternative capital, that will ensure they remain disciplined on pricing, benefiting the industry as a whole, said Gharib.

There are already signs that the industry is turning a corner, he added. The RoC-CoC gap had shrunk from -4.6 percent to -2.7 percent by the end of March 2019, and had further improved at the half-year mark, S&P said. It expects RoC to cover CoC in 2019 and 2020.

Gharib said: “Once the dust settles we will be left with investors that understand their exposures and their diversification benefits. With interest rates still low, and potentially falling further, insurance-linked securities and cat risk will remain attractive for many investors.”