Following the impacts and losses from hurricanes Harvey and Irma some reinsurance firms may find their earnings depleted and shares trading below book-value, but rather than looking to equity raising to help them through, reinsurers should tap into alternative capital, according to analysts at Morgan Stanley.
The analysts make a valid point. This is the time in the reinsurance market cycle when reinsurers can take advantage of alternative capital more, positioning themselves as a conduit to risk for the many institutional investors looking to enter the market at a time of dislocation.
With investors aware that there are opportunities to secure higher pricing at this time, reinsurers could capitalise on this by bulking up their existing third-party capital vehicles, or by launching new ones to provide a second and sometimes more efficient balance-sheet.
The analysts from Morgan Stanley feel that price stabilisation and improvement will be seen, as a confluence of factors affect the reinsurance industry in the wake of hurricanes Harvey and Irma.
As we revealed on Friday, ILS fund managers are already accepting capital inflows in order to take advantage of some improved pricing in opportunities created by the aggregation of the two large hurricane losses. Reinsurers could also look to the capital markets to help them do the same.
Reinsurance firms may need to move quickly though, as “magnitude and duration of a potential upturn could be muted by the availability of ample alternative capital,” the analysts explained.
They also said that ILS investors “may demand higher pricing to compensate higher perceived risks,” although it seems that so far the pricing has been more relationship and demand based, rather than due to any risk commensurate change.
Morgan Stanley’s team also said that the fact collateral will become locked-up following the hurricane losses could drive some price firming as well, and we’re told this is the case on certain affected layers of retrocessional reinsurance.
Reinsurers could leverage alternative capital as a way to provide themselves with the liquidity required to underwrite and trade through any market dislocation, but of course they also risk perpetuating the softening cycle and as we move forwards to January the 1st it seems rises could be muted if inflows of new capital are too large and not controlled.