Partnering with alternative capital, by establishing asset management units, is not enough alone to protect property catastrophe focused reinsurance firms from the competitive effects of third-party reinsurance capital, insurance-linked securities and the capital markets.
So suggests Moody’s Investor Services, the ratings agency, in an update on Bermudian catastrophe reinsurance firm Validus Holdings. Despite Validus’ diversified business strategy and its early mover advantage in ILS and alternative reinsurance capital management with its AlphaCat unit, it is not immune from the effects sweeping the reinsurance sector.
The property catastrophe reinsurance market is facing increasing competition from alternative forms of reinsurance capital and capacity. The capital, largely entering the market through ILS asset managers, catastrophe bonds, collateralized reinsurance instruments and sidecars and coming from a broad range of institutional investors is competing directly with reinsurers like Validus for core business.
Moodys’ says that even reinsurance firms like Validus which have already partnered with alternative capital in dedicated units are not immune from this competition which is eroding reinsurers positions in the market.
Validus has been involved in ILS with its AlphaCat Managers unit, operating a number of third-party backed sidecars and dedicated ILS funds which are open to external investors.
Numerous reinsurers are now establishing units dedicated to taking in third-party capital for deployment within underwriting with a goal of generating fee income from asset management. Moody’s is effectively saying what many realise, that this is no panacea and will not save reinsurers from having to compete directly with new forms of capital. Even the third-party capital a reinsurer manages itself is in competition to some degree with its own equity capital.
Moody’s says that the impact of alternative capital on the reinsurance market will become clearer over the next year and this will likely colour their rating opinion, whether positively or negatively, on reinsurers such as Validus.
Moody’s noted that should Validus be able to maintain its risk-adjusted profitability in aggregate, despite the impact of alternative capital on the catastrophe reinsurance market, it could positively affect its ratings in future. Interestingly Moody’s cites alternative capital’s impact on the reinsurance market, in terms of pricing and competition, as the number one factor that could lead it to amend its rating on Validus, extremely telling.
Despite all this Moody’s affirmed Validus’ ratings and gives the reinsurer a positive outlook, which shows that it is by no means all bad for property catastrophe focused reinsurers with alternative capital management units. It does, however, show the seriousness with which the impact of alternative capital on reinsurance is being assessed and that it should not be taken lightly.