Insurance capital raising – Bolstering existing firm’s or funding start-ups?

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While the global response to the COVID-19 pandemic has contributed to an unprecedented economic slowdown across the world, potentially reducing the value of insurable risk, market dislocation is creating attractive opportunities for insurers in some lines of business. In response, capital is coming into the sector, leading to questions about the emergence of a Class of 2020.

A number of existing companies, including Beazley, Fidelis, Hiscox, Lancashire, QBE and Renaissance Re have announced capital raising initiatives to bolster balance sheets in response to uncertainty as to the scale of the impact of COVID-19-related losses on earnings and to take advantage of an expected hardening market.

Initial stress testing conducted by AM Best to gauge the preliminary impact from the COVID-19 pandemic on rated insurers’ financial strength found that capital levels provide an adequate buffer against a potential shock to their balance sheets. Overall, insurers are likely to see a significant hit to earnings in 2020, rather than a material decline in risk-adjusted capitalisation. However, the unprecedented impact of COVID-19 on the industry, and its effect on global economic activity, means that companies could still face credit rating pressure if market conditions deteriorate beyond prescribed scenarios.

Rate hardening likely to accelerate

Rates in a number of lines of business were already hardening going into 2020, and as insurers respond to elevated claims experience and capacity constraints AM Best expects rate hardening to accelerate, at least in the short term.

AM Best has observed more business flowing to wholesale markets with favourable trends and potential opportunities particularly apparent in specialty, US excess and surplus lines and reinsurance markets. The ease with which companies have raised equity – and the subsequent increase in share prices – likely reflects the absence of other opportunities for investors.
The low interest-rate environment has forced investors – particularly institutional investors
– to look further afield for yield opportunities. The risk and reward calculation posed by the insurance sector in a hardening market may start to look more attractive to existing and new investors, including private equity, as highlighted by the USD 610 million new capital injection into Starstone.

But there is also increased speculation that capital is looking to support new company formations – keen to benefit from hardening rates and terms and conditions.

Hurdles remain for potential new start-ups

AM Best recognises there are significant hurdles for new companies looking to establish themselves quickly to take advantage of beneficial conditions. These hurdles include the need to secure capital, regulatory approvals, licences and underwriting teams, as well as gaining market acceptance.

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