Reinsurance capacity shortage deep set, hard market guaranteed into ‘24

Reinsurance capital shortfalls should continue to lag short of demand and ensure a hard market well into 2024, with recent capital increases from select players insufficient to make even a blip on the charts, analysts at Morgan Stanley have claimed.

“Limited capital should continue to support a strong hard market environment for reinsurance, especially in property catastrophe heading in 2024,” analysts said in research initiating coverage on the industry and fourteen major carriers and brokers.

Capital may accrete to the industry at about a 5% pace in 2023 to add $21 billion to the tally, a far cry from the 14% or $61 billion shed in 2022, chiefly as tectonic shifts in interest rates slashed bond portfolio valuations.

With that shortfall, and with demand driven by heavy claims inflation, the type of single digit billion deals seen to date can offer little more than a ripple.

Everest Re made some of the biggest go-for-growth headlines with a $1.5 billion secondary share offering ($1.3 billion net). Management said straight out it was bulking up for a strong run at mid-year renewals and beyond. “We are on offence,” CEO Juan Andrade told investors.

RenaissanceRe also announced major capital needs, but those sums will not increase overall market capacity. RenaissanceRe raised $1.35 billion in an early step towards funding the $3 billion purchase of AIG’s reinsurance operations, chiefly Validus Re, exclusive of 95% of reserve development, plus the ILS manager AlphaCat and renewal rights to the treaty reinsurance book at Talbots. But that is not new market capacity.

Those deals and several smaller “should not disrupt the supply/demand imbalance,” Morgan Stanley analysts wrote. “The recent capital raising should not have a major impact on the reinsurance supply/ demand dynamics as the industry faces a much tighter capital environment.”

Morgan Stanly puts Arch Capital in first place as attractive investment targets, citing the group’s ability to move capital quickly amongst business lines to capture top opportunity, currently towards reinsurance.

Everest Re also makes the ranking, called “well positioned to benefit from hard market conditions in reinsurance.” Newly raised capital can be put in play quickly, a job that will be wrapped up by the January 2024 renewals, Morgan Stanley analysts believe.

RenaissanceRe was put lower at even-weight, albeit largely just for strong pricing in listed shares to date.

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