Balancing expectations in Bermuda and London

The hope of boosting balance sheets and taking advantage of improvements in pricing has resulted in an upswing of capital-raising activity from established insurance players and startups in London and Bermuda. Across the board, there is a view that this market offers good opportunities for investors, but investor expectations and prospects could vary.

This was one of the main points from an interview with Catherine Thomas senior director, analytics at AM Best on February’s Best’s Special Report “ London and Bermuda Attract Capital as Insurance Market Conditions Improve”. The interview took place on Intelligent Insurer’s Re/insurance Lounge, the online platform where interviews and panel discussions are available on demand.

“Capital inflow has exposed the absence of other opportunities for investors and the low interest-rate environment has made investors look for new possibilities,” said Thomas. “The Bermudian and London market insurers have been able to raise equity with relative ease, which suggests that investors have confidence in the near-term prospects of the sector,” she added.

The past year has seen a huge increase in capital raising from established and new organisations in London and Bermuda. Capital inflow has been boosted by a combination of private equity, industry capital and public placements. The risk-and-reward calculation posed by the insurance industry in a hardening market may look more attractive to existing and new investors. Improving market conditions in a broad range of sectors in the re/insurance markets have contributed to capital inflow.

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Thomas said that these new and established players are looking to bolster balance sheets and take advantage of perceived improvements in pricing and conditions. While both established and new capital investors are attracted to opportunities for the market, their reasons differ.

“The established players are looking to bolster their balance sheets and take advantage of favourable market conditions. However, given the overriding uncertainty brought about by the pandemic, the market will likely respond with increased discipline,” Thomas said.

“New market players have the advantage of clean balance sheets and the absence of legacy systems, but they also face some new challenges—including the task of creating new relationships with clients during the time of the pandemic, when remote working has become the order of the day.

“The startups are attracted by broad hardening market conditions, but what is interesting to consider here is that while third party capital does continue to flow into both the primary and re/insurance markets, the pace of that flow has lessened over the past five to 10 years,” she said.

She noted that there is still a great deal of uncertainty and it remains unclear if capital inflow is sustainable, because that uncertainty could also stifle price improvements.

“A feature of this hard market is that capital is attracted by an improvement in rates, and that improvement has been led by the insurance sector,” she said.

“Across the board, there is a view that this market presents good opportunities for investors, but investor expectations may vary.”

Discipline needed
Thomas added that it would be prudent to sustain underwriting discipline because exceptionally low investment returns are available to the industry at the moment. The economic consequences that the pandemic will have on the demand for insurance are also highly uncertain. There is still a concern that a pricing correction may be needed as rates continue to rise.

There are also significant uncertainties ahead in terms of the supply-demand balance for both commercial insurance and reinsurance because of the uncertainty around the economic consequences of the pandemic, which will ultimately impact the insurance market.

“With the true extent of COVID-19 losses still unclear, it remains to be seen what the true impact will be on the insurance industry. As economies shrink, insurable risk will fall and the appetite to retain risk could diminish,” Thomas added.

The prospects for mergers and acquisitions (M&A) activity will also diminish because it is difficult to assess an organisation’s true value during economic uncertainty.

Thomas added that the consequences of the pandemic on demand for insurance will largely depend on the extent of the economic downturn.

She said that as economies decline, so does the value of insurable risk. However, when businesses come under financial pressure, their appetite to retain risk may also reduce, which will increase the demand for insurance.

“In a hard market, against the backdrop of low interest rates, we believe that companies should focus on capital efficiency, particularly at a time when many will be wanting to use capital to write new business,” said Thomas.

“We should never forget that there is still significant uncertainty and capital should be used to support core operations, so it will be interesting to see how that capital is deployed.”

To view the full Re/insurance Lounge session click here.