Alternative capital both competitor & partner of London market: A.M. Best

Despite being a clear contributor to the competitive operating environment, London market insurers and reinsurers continue to increase their use of capital markets capacity to protect their balance sheets, according to A.M. Best.

Global financial services ratings agency A.M. Best has underlined the benefits and challenges for the London market from the flow of alternative reinsurance capital and its features.

“Alternative reinsurance capital may be a competitor for traditional London market players, but it can also be a partner, and there has been increased use of the capital markets for balance sheet protection,” said A.M. Best, in a recent report examining the London re/insurance market’s operating environment.

Artemis has discussed previously how re/insurers can utilise the insurance-linked securities (ILS) space to strengthen balance sheets, embracing its features and capacity as opposed to fighting against it for a seemingly shrinking market share.

Numerous industry executives and organisations have noted that third-party capital is both a challenge and opportunity for the re/insurance industry, but in more recent times London market players have increased their use of the expanding ILS space.

“Beazley, Hiscox and Novae now all manage special purpose syndicates, which are side-car-like arrangements that allow third-party capital to access business written at Lloyd’s. In addition, a number of market participants have set up fund managers that specialise in insurance-linked securities,” explains A.M. Best.

An example of the benefits of working with ILS can have on the balance sheet of a London market player can be seen with Hiscox and its ILS business Kiskadee Investment Managers, which, provided the firm with greater income in 2016 as it looks to growth its ILS assets under management (AuM) to $1 billion by the end of 2016.

The same can be said with Novae Group’s special purpose Lloyd’s of London syndicate 6129, which it launched in partnership with Securis towards the end of 2015. Novae said at the start of August that the launch of its “ground-breaking” syndicate has driven growth in its U.S. E&S property business.

The flow of alternative capital reportedly slowed at the key January 1^st renewal season, as investors looked for returns that are more desirable outside of the property catastrophe space. However, A.M. Best notes that the inflow of third-party reinsurance capital actually increased, albeit modestly, at mid-year renewals, which are dominated by U.S. property catastrophe placements, the main focus of ILS, currently.

Catastrophe bond issuance declined in the first-half of 2016 when compared with the previous year, but there has been a noted increase in the use of other forms of ILS, such as collateralized reinsurance and also retrocession, where ILS markets play a key role.

This, combined with benefits being realized by companies like Novae, Hiscox, Aspen via its Aspen Capital Markets unit and investments in ILS-focused managers such as Leadenhall Capital Partners, of which MS Amlin is heavily involved, shows how London players can work with ILS to assist them during the soft market.

ILS capital and its investors are becoming increasingly understanding of the market and showing discipline at a time when certain reinsurers and insurers are practicing less-disciplined approaches to managing the challenging market.

The willingness of the ILS space to access the Lloyd’s and broader London market remains strong, and companies would be wise to adapt their strategies and underwriting practices to incorporate the wealth of efficient, diversifying capital that’s waiting to be deployed, else risk losing out to it.