As we move towards the important mid-year reinsurance renewals, which see a large programs renewed and a focus on Florida hurricane coverage, analysts at Macquarie have warned that they see the influx of third-party capital driven reinsurance capacity as a ‘bear case’ for the reinsurance sector. The increasing supply of reinsurance capital is likely to keep putting pressure on reinsurance rates and this isn’t likely to be offset by any new demand for coverage.
A report published recently by Macquarie analysts recommends selling stocks in some reinsurers and downgraded the outlook on many reinsurance firms from outperform to neutral. The analysts said that pricing at the recent April 1 renewals was ok to disappointing and the focus has now moved onto Florida and the mid-year renewal season.
They see two cases, a bullish outlook based on changes at Florida Citizens which could result in more risk being transferred to the private reinsurance market over time, and a bearish outlook centered on new third-party capital entering the reinsurance market, increasing supply and keeping downward pressure on prices.
The analysis performed by Macquarie led them to conclude that new demand at the upcoming renewals, some of which is leaking out of Florida Citizens, will not be enough to sufficiently increase demand for reinsurance to offset the downward pricing pressure from new inflows of alternative and third-party reinsurance capital. Hence the downgrade for some major reinsurers in its latest analysts report and the recommendation to sell reinsurer stocks.
Macquarie’s analysis goes into some detail looking at the potential for policies to be moved out of Citizens and into the private insurance market, thus increasing the need for private reinsurance and risk transfer, but concludes that at the upcoming renewals this is unlikely to be a particularly meaningful volume.
Therefore Macquarie believes that alternative reinsurance capital, and the general increase in reinsurance capacity, will outweigh any benefits that new business opportunities will bring and so pricing is expected to remain depressed they say. Macquarie don’t blame this on third-party capital, stating that the make up and sourcing of reinsurance capacity as a whole is much more complex, but recent inflows of third-party capital are certainly helping to keep rates down and this is likely to continue, hence their sentiment on reinsurers changing to sell.
The general sentiment in the analysts report is that the upcoming renewals are going to be difficult for reinsurers, with alternative and traditional reinsurance capacity abundant and helping to temper pricing. It’s possible that these renewals will be competitive, perhaps in a way that may surprise some traditional reinsurers, as some managers of third-party capital have capacity that they need to deploy and this is likely to make competition to get on reinsurance programs more intense than perhaps experienced before.
Macquarie are not the first analysts to cite the influence that third-party reinsurance capital is having on traditional reinsurers as negative. Of course as rates get depressed by an influx of capital, some of which is third-party sourced, it is also having an impact on third-party capital managers return potential as well. So it is not just affecting traditional reinsurers, it affects the alternative players too.
In some cases the alternative reinsurance capital players are better positioned to act in a nimble, innovative manner to adapt to the rate environment. Some traditional reinsurers are now positioning themselves so that they can adapt to the rate environment and capital flow just as well. It is the traditional reinsurance firms who haven’t yet addressed how they will adapt to the ‘new normal’ that alternative capital is forcing on the reinsurance market who may find market conditions toughest.. The upcoming renewals are going to be interesting to watch.
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