Hard pricing & low interest rates could signal return of investor capital: Moody’s

After a period of relatively low activity over the first half of the year, analysts at Moody’s believe that some alternative capital investors could return to the market based on a combination of hardening prices, low interest rates, and growing clarity on COVID claims.

Speaking at a briefing alongside the release of Moody’s Global Reinsurance Outlook report, Associate Managing Director for EMEA Insurance Antonello Aquino explained that alternative capital will always depend on the broader interest rates dynamic.

“We’ve always said when interest rates are low, clearly there is more capital looking for higher investments,” he said. “Over the last six months we have seen interest rates coming down, and I think our expectation is that that will continue for the foreseeable future.”

“While there has been a drawback in alternative capital and some investors have had their fingers burned, as interest rates stay low you may see a return of some of this capital,” he added.

Aquino’s comments came as Moody’s changed its outlook on the global reinsurance sector to negative from stable, largely due to coronavirus-related losses and other catastrophe events in 2020.

Negative factors were offset to some degree by improvements in reinsurance pricing, helped by the reduction of capacity in the alternative capital market, although the rating agency maintains that pricing is still insufficient relative to risk.

But these improvements in pricing could prompt some investors to return to the market and gauge demand at the January renewals, even after poor performances in 2017 and 2018.

“The broader capital markets have been challenging earlier in the year,” said Vice President James Eck. “It seems like they’re calming down a little bit, or at least the downside is calming down.”

“Interest rates are low,” he added, “so it may end up being that the pricing looks pretty attractive relative to other spread instruments in the market over the next several months.”

Eck also noted that the market has experienced a difficult capital raising environment over the last few years, with some funds winding down and being put into run-off.

“There’s been somewhat of an investor flight to quality that benefits the larger, more established fund managers,” he remarked.

“And that includes a number of the reinsurers that have third party capital platforms. Some of them have been beneficiaries from this shakeout in the alternative capital market over the past couple of years.”

Moody’s believes this trend has led to stricter underwriting standards and a focus on risk-adjusted returns and volatility around modelled results, which should help the alternative reinsurance capital market to grow from a healthier position in the long term.

Overall, analysts consider reinsurers with affiliated sidecar vehicles to be in a stronger position right now, compared to those that have to go out to third parties or the alternative capital markets to buy, where prices are much higher.