S&P suggests reinsurers may have to look to alternative routes to access new capital

by Artemis on September 9, 2011

Ratings agency Standard & Poor’s published a report on Monday this week providing some insight on the health of the global reinsurance industry. It says that their outlook on the sector remains stable as the multiple catastrophes faced this year fails to erode most reinsurers capital surplus. The report contains some interesting thoughts on reinsurers ability to attract new capital from investors which might interest our readers.

S&P suggest that reinsurers may have to work hard to attract investors and new capital this year. They say that the catastrophes experienced so far this year have made a dent in reinsurers earnings, although not enough to erode their capital sufficiently for S&P to change their outlook on the sector. However, they ask whether after another major event (such as a major landfalling U.S. hurricane) investors would be there to help replenish lost capacity?

S&P point out that many publicly traded reinsurers stocks are looking undervalued right now and say that the low price to book ratios suggest that investor interest in reinsurers could be low and should the need arise investors may not be as keen to step in as in previous years.

S&P suggest that capital could instead flow into the alternative and convergence markets of insurance-linked securities, catastrophe bonds, industry loss warranties and sidecars as they could all be more attractive options for investors at this time. These more flexible forms of capital could attract investment that might otherwise have gone to traditional reinsurance as they offer a more predictable investment opportunity in many cases and are easier to exit than starting a new entity from scratch or re-capitalising a reinsurer hit by heavy catastrophe losses.

These thoughts are interesting as they tally with what we are hearing from many investors we connect with. A lot of interest remains in the reinsurance sector but investors are looking for flexible ways to use their capital, with quick set-up and decent returns. Many investors also consider these types of alternative reinsurance facilities as less correlated to wider financial markets than a traditional reinsurer. Another trend we see is for new reinsurance vehicles to be set up with a dual focus on writing traditional reinsurance and collateralized retrocessional reinsurance which seems to attract greater interest from investors.

It will be interesting to see where the money goes later this year, especially if there are more losses for the industry to contend with.

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