Investors seek defined duration, M&A on way

New capital is starting to enter the re/insurance industry, but investors remain wary, preferring to invest via structures that offer an exit after a defined duration, Jarad Madea, chief executive officer, Howden Capital Markets & Advisory, told Monte Carlo Today.

“Capital is starting to enter the industry, after a two-year hiatus where rates have been very hard,” he said. “But investors remain cautious.” He noted the majority of new investment is coming via cat bonds, sidecars or funds at Lloyd’s, all of which can offer a set term for the investment, with liquidity at the end.

“Investors are willing to take a risk on where rates are right now, or over two or three years, but they are more hesitant to take a view on where the industry will be in five years’ time,” he said.

“Deals are happening, but in moderation.” He added that private equity (PE), a usually reliable source of new funds for the industry, is either already invested or feels there are better options outside balance sheet re/insurance. “They are seeing better opportunities on the distribution side,” Madea said.

Investors have taken time to regain trust in the industry, after a long period of underperformance and losses, he explained. The biggest crunch came in 2022 in the lead-up to the year-end renewal. Supply of cat capacity in particular had shrunk, and rates looked certain to spike. Yet investors remained cautious. 

“Investors didn’t believe rates would spike as they did. When they did, many still wanted to wait in the wings for another year to see how things would play out. There is more interest now. We are seeing vehicles come to market. But these are not long-term balance sheet plays,” he said.

Consolidation 

As market conditions start to change, another trend is likely to emerge: consolidation. Madea says four key drivers will make mergers and acquisitions (M&A) between carriers more likely over the next two years.

“PE investors will want to realise their profits.”

The first is that rates are expected to plateau. As this happens, carriers will need to seek new ways to grow, and M&A can offer a solution. The second is the profits they will have made over two years of good market conditions. “They will have excess cash to use,” he noted.

The third driving force could be PE investors already with a stake in the business but eying an exit plan in the next two years. “A lot of money came in around 2020/21. PE investors will want to realise their profits,” Madea explained. 

The fourth driver could be inadequate casualty reserves in certain pockets. “Some companies may need a buyer to solve specific problems like that. Others may turn to the legacy market or reserve covers,” he noted.

He warned of inevitable impediments to deals happening and noted that the expectations of buyers and sellers around valuations can be an issue, as can the social dynamics of different companies. “You have two CEOs, two different cultures. What works on paper does not always translate into the real world,” he said.

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