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New re/insurance capital adds up to about $12bn

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Capital flow: Maamoun Rajeh of Arch Capital reckons re/insurers have raised about $12 billion this year (File photograph)
Vicky Carter of Guy Carpenter

About $12 billion of new capital has flowed into the re/insurance industry this year, most of it going to existing companies rather than start-ups.

The estimate was put forward by Maamoun Rajeh, chairman and chief executive officer of Arch Worldwide Reinsurance Group, speaking in a virtual panel discussion hosted by Women in Reinsurance.

Several Bermuda and London re/insurers have raised substantial amounts through debt or equity issuances.

“By my calculations, the industry has called up about $12 billion,” Mr Rajeh said. “Some small element of that is still aspirational, yet to be confirmed, while about $2 billion is from new companies.

“The vast majority of the rest is from existing platforms. That’s what’s distinguishing the capital-raising this time around from prior.”

RenaissanceRe, Arch Capital, Fidelis, Hiscox and Lancashire Group are among the Bermudian firms to have attracted large investments. A start-up called Vantage, led by former Arch chairman Dinos Iordanou and former Axa XL CEO Greg Hendrick is also in the pipeline.

While much of the money is earmarked for boosting underwriting capacity to capitalise on opportunities from rising rates, some may be intended to bolster balance sheets amid great uncertainty over the extent of pandemic-related claims that insurers may have to pay.

“The clustering of the early raises felt to me like they were slightly more defensive-minded than playing offence,” Mr Rajeh said. “With time, the more recent raises have been more forward-looking.

“Either way, in this environment it’s wise to raise capital. Cash is king, there are a lot of uncertainties. It’s not just on the liabilities side, you also have to worry about the asset side of the balance sheet.”

In June, Arch Capital, Mr Rajeh’s employer, raised about $1 billion through a debt issuance.

“Certainly, from Arch’s point of view it’s capital to be deployed offensively,” Mr Rajeh said.

He added: “The way our business works, when rates go up, it triggers more capital. Clients are going to need more support and that capital has every chance of being deployed.”

More than $20 billion had already been reserved by the industry to meet likely Covid-19 claims, he said, and the uncertainty of the pandemic’s impact would likely cause some capital to become “trapped” in insurance-linked securities.

Mr Rajeh added: “There is a higher need for capital, and frankly that capital will get more dear as we move forward.”

Vicky Carter, chairwoman of Global Capital Solutions, International for re/insurance broker and risk adviser Guy Carpenter & Company Ltd, said her firm was “involved in a number of start-ups forming in both London and Bermuda”.

She said: “Today to start up a new business, ideally you’re going to want to have $1 billion of capital — and that’s not an insignificant amount of money. To start from scratch with $1 billion of capital to fill is not an easy task.

“There will be a lack of capacity in certain classes this year and that will certainly help new entrants.”

She added that investors were more selective about where they were putting their money than in some previous hard markets.

Ms Carter said: “Capital is going to the strong management teams with experience and strong track records. Capital is getting more discerning about where it goes.”

Investors were looking for teams who had experience of managing the insurance market cycle — many of today’s underwriters had never experienced a hard market, she added. This was one reason much of the new capital was going to existing platforms. Another was the challenges that come with starting up a new re/insurer.

“The process today of starting a business is considerable, whether in Bermuda or in London,” Ms Carter said. “In Bermuda you need to have a rating, and the process of applying to set up a new business at Lloyd’s is hugely time-consuming.

“There’s a lot of capital out there and much of it likes the diversification that the industry gives — uncorrelated risk in many regards — but I think it’s going to be much more discerning about where it goes this time around than say, post-Katrina.”

Ms Carter said that at the start of this year, most people would have considered the industry well capitalised. Since then, considerable challenges had emerged, such as the question of whether insurers might be held liable for disputed business interruption insurance claims.

“A lot depends on what happens with Covid,” Ms Carter said. “If, for example, the courts ever ruled that insurers would have to pay retroactively, it would bankrupt the industry.

So the industry is facing huge amounts of headwinds, but, at the same time, it’s a really exciting time.”

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Published October 19, 2020 at 8:43 am (Updated January 21, 2021 at 5:01 pm)

New re/insurance capital adds up to about $12bn

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