Panel: Opportunities remain for reinsurance start-ups but investor appetite limited by post-Katrina lessons

Investor appetite to back new reinsurance start-ups has been limited by lessons from the post-Katrina hard market, according to a panel hosted by Aon.

The panel heard that the $10bn to $15bn of new capital entering the P&C reinsurance market over the past 12 months has largely focused on niche investments in existing players.

This was attributed to investor concern over a path to exit for new start-ups, the panel said.

Kathleen Monaghan, head of corporate finance at Aon, said that opportunities remain for both new and existing players to capitalise on the hard market.

“To date, we estimate about $10bn-$15bn of new capital has entered the market, but largely in the form of sidecars, or really niche investments, or into existing players,” she said.

“But we think that there's still an opportunity for clean balance sheets to take advantage of the rate environment, as well as new money yield coming through on investments and managing through a new underwriting cycle.”

Matthew Botein, co-founder and managing partner at Gallatin Point Capital, affirmed the investor interest in targeted specialty players and structured investments such as sidecars, as these have a clearer path to exit, adding that “investors learn lessons from their own past experience”.

For example, he noted that companies formed in 1985-86 amid the excess casualty crisis, as well as those formed in the wake of Hurricane Andrew and 9/11, generally went on to have success as the dislocated market created enough momentum to build a company, go public, and exit.

However, the post-Hurricane Katrina market in 2005 proved much trickier as the hard market was shorter lived.

“I think some of the companies that launched then struggled to build a business, get public, and get their investors out. A bit of the enduring lesson from that vintage of companies was that that's a pretty tricky high wire to start up a $1bn business, get it to $2bn, get public in a still hard market and get out,” Botein explained.

P&C specialty

As a result, capital has been drawn to P&C specialty over recent years with investors generally showing interest in targeted specialty players with a clearer exit path, either through going public or by selling to larger balance sheet entities looking to diversify and grow their businesses.

Botein added that, unlike the life business, P&C remains principally driven by underwriting economics and underwriting alpha.

“Whereas on the life side, we're seeing the marginal trades are generally asset-driven, so you see the economics being really driven by those credit and alternative fixed income asset managers who can make the greatest spread on the investable assets,” he explained.

“We haven't seen that really affect or influence the P&C side nearly as much where pricing trends and underwriting trends have maintained greater independence from the increase in rates and spreads.”

Monaghan added that E&S and specialty markets remain very robust – particularly in comparison to personal lines such as auto and homeowners – in terms of valuation, especially on the US side.

“We've seen the roll-out strategy with these large annuity trades and the growth in platforms with several block transactions. Now, we're seeing some of those players also enter the P&C space and take advantage of some of the dislocation in those markets and leverage the float on the asset side, potentially to build large multiline channels,” she said.

“It seems like we go through these cycles where we have multiline organisations and then we have more focus on specialty and niche operations. You have this ever-changing consolidation and de-compartmentalisation of assets depending on the return and how to leverage the macro environment.”

Reinsurance sector

The panel, which was hosted by Kelly Superczynski, head of capital advisory at Aon Reinsurance Solutions, also discussed the status of investor appetite in the reinsurance sector.

Greg Share, managing director, global opportunities at Oaktree Capital Management, outlined that the turn to capital-light models was predominantly driven by a history of balance sheet entities earning subpar returns over a long period of time.

“Interest rates have been a major factor as people compare what they can get in the (re)insurance market generally with other opportunities,” said Share.

“There's a rotation of investors – a lot of investors were investing in those products a few years ago because we were in a zero interest rate environment and they provided a non-correlated return. Now, investors can get that same kind of non-correlated return just by buying treasury bonds, so that's put pressure on them.”

Monaghan added: “On the sellers of (re)insurance, the unrealised losses flowing through the fixed income portfolio had an immediate impact on equity, therefore impacting the supply of capital in the (re)insurance side.”

Share concluded that although there remains concerns over trapped capital in reinsurance vehicles, this in fact presents an opportunity for investors that have an understanding of the sector.

“We view that as an opportunity for investors that really understand the sector,” he said. “And it's not only a question of pricing being better at this time, but the terms and conditions will be much better in reinsurance, and I think the reinsurance folks are benefiting from that.”