2021 to be hardest P&C market for some time, start-ups likely: Analysts

Market forces suggest that 2021 could see the hardest property and casualty (P&C) insurance and reinsurance market conditions for a long time, according to equity analysts at Wells Fargo Securities.

The stars are aligning in the P&C re/insurance space, with losses set to flow from the Covid-19 pandemic and the end-result being the hardest market conditions seen in well over a decade, perhaps much longer.

Already the mid-year reinsurance renewals are showing that the market is now hardening, not just firming, with Florida’s rates thought to be broadly up 20% to 25% by our sources, while analysts suggest 25% to 45% in Florida, with edge cases seeing some cedents paying much higher rate increases and agreeing to much stricter terms.

The Wells Fargo Securities equity analyst team led by senior analyst Elyse Greenspan believes that hardening is set to continue and that this could result in the launch of new start-ups as well.

“Covid-19 has the potential to cause a broad-based turn in the insurance and reinsurance markets,” they explain.

“Covid-19 can only help intensify the market momentum. We will see losses across many business lines and while it will be an earnings, and not a capital event for the majority, some will be capital constrained, alternative capital will be trapped, and the market will become even harder than it is today”

“To us, the breadcrumbs are there for 2021 to be the hardest market the P&C industry has seen in some time. It seems like momentum is building for this to be one of those markets that draws new capital to the space and a new round of (re)insurance startups could be forthcoming,” Greenspan and team writes.

This is aligned with discussions we have been having.

We’re aware of a number of initiatives to launch new insurance and reinsurance start-ups, along the lines of the Class of 2001 and 2005 start-ups that launched in Bermuda.

Most of these are likely to focus on specialty, wholesale and commercial insurance and reinsurance it seems, eyeing the chance to launch into a market that is hardening rapidly and be ready for January if possible.

This is also making launching through acquisition an increasingly attractive proposition, as launching afresh and gaining the licenses need to get underwriting takes time.

So as to be ready to capitalise on the best underwriting opportunities, which may peak at the January 2021 through mid-year 2021 renewals, would need capital to pour into established players.

We’re told private equity investors are looking closely at some names in Bermuda that are perceived as being weaker and less well-capitalised, so could be open to acquisition and capital injection.

Other major investors want industry rainmakers to head up initiatives, to guarantee the kudos and access to the market that comes with big name former CEO’s and the like.

There are also at least two new ILS fund manager initiatives underway, that are planning to launch in time for January and bring experienced fund managers from the space together with large, seed institutional capital providers and also include partners that have sources of risk, to give them a springboard for launch.

We’ve also heard rumours of a hybrid start-up, featuring a rated carrier and equity backed balance-sheet to provide operational funding, working capital and a degree of leverage, while the underwriting firepower would be backed by funds or market-facing sidecar type structures.

However, this isn’t a new model and has been discussed at length before (by us and others).

It’s also akin to the model that has been adopted by some ILS fund managers, although listing the operational balance-sheet as an equity play, while having the underwriting capacity collateralised underneath, is taking the rated ILS front business model a step further.

As ever, when the reinsurance and specialty/commercial insurance markets harden, investors look to enter and take advantage of the rising returns.

But this time the motivation is even stronger for private equity investors and also institutions such as pensions funds and sovereign wealth actors, as the Covid-19 pandemic has shown that any strategy that lessens the correlation with broader markets, which insurance and reinsurance can do to a degree even as an equity play, is extremely attractive at this time.

As a result, it’s not just about starting up to earn multiples on your initial investments, it’s also about capital preservation, defensive investing and upsizing on allocations to a market that consistently holds a degree of uncorrelated returns, at a time when almost everything else has already proved itself to be correlated.

Market conditions are almost guaranteed to make the next year or two a fascinating time to observe the insurance and reinsurance space, as well as a good time for innovation in terms of business model.

We expect to see more hybrid attempts to deliver scale to capital market investors, by integrating the ILS and traditional market models more fully, as well as attempts to launch more meaningfully sides ILS fund managers over the next few years.