MC roundtable: Reinsurance volatility limiting investor interest as other industry segments draw funding
Investor appetite for the insurance industry remains strong, but volatility in the reinsurance space means there has been limited appetite to support start-ups in that sector, especially when there are potentially greater returns to be found in the wider market.
The high interest rate environment of recent years has pushed up return expectations among investors, and that has been to the detriment of start-ups looking to make a play in the reinsurance industry, according to panellists at a roundtable during the Monte Carlo Rendez-Vous hosted by The Insurer in partnership with Lloyds Bank.
“I don't think it's a complete coincidence that the macroeconomic cycle is where it is, and as a result you've not seen the inflow of capital into reinsurance start-ups in the way you might have before,” said Michael Smyth, relationship director at Lloyds Bank.
As Smyth noted, investors have put money into the wider insurance industry, but to date, there has been a notable lack of reinsurance start-ups.
“Private equity – that's where start-ups are made generally. They’re the ones who typically need to take that first risk and be a cornerstone in any raise, and we just haven't seen them wanting to come in in that way [to support new reinsurers].
“Even the ones who have raised dedicated insurance funds haven't put it to work in reinsurance start-ups. There are firms who have raised billions of dollars for funds dedicated to this sector, and that's not where they have invested this capital. I think that's quite telling,” Smyth said.
SiriusPoint CEO Scott Egan said that investors, if they have money to deploy into the (re)insurance value chain, now have a wide range of options. And, as Egan explained, reinsurance does not fare well against other sectors in the industry.
“Whether we like it or not, if you look at it through an investment lens, the reinsurance sector does not attract the highest valuations,” he said.
“You've got reinsurers that haven't made money consistently, and there's unpredictability. There's better valuations elsewhere, and so the capital follows the money.”
Investors looking elsewhere
With the global macroeconomic environment, interest rates lowering and reinsurance pricing – notably in property – now showing signs of softening, Egan said he “can’t see it changing”, with investors still looking at other parts of the (re)insurance market for opportunities.
When it comes to what needs to change to draw investors back into supporting reinsurers, Smyth suggested stability is key.
“I don't think reinsurers need to make outsized returns to attract investors. There are investors out there that'll very happily take mid-teens IRRs. Those with long-term strategic funds – that's exactly what they want.
“But they need it with an element of stability. If you're going to achieve a certain return level, then investors need to have confidence that is what you're going to achieve consistently, which hasn’t been the case,” he said.
Because of that, Smyth said the reinsurance industry “has a lot of work to do to get those investors back on side”.
“A lot of the old arguments about it being a non-correlated sector – ‘you've got to come in because it's a hedge for the rest of your investments’ – I don't think they believe anymore, albeit it still holds true to a greater degree in ILS and sidecars, which is partly why demand in those areas has remained,” he said.
“And whether it's Covid or the global financial crisis, there have been so many occasions where, whilst pure insurance risk might be non-correlated, I don't think insurance companies are non-correlated in a way that investors always used to be told,” Smyth added.
Lack of start-ups
The current lack of investor interest in the traditional reinsurance industry is evident in the lack of start-ups that have entered the space. While several newcos have been rumoured for some time now, they are yet to actually launch.
As Tracey Anchundia, head of insurance, North America – financial services at Lloyds Bank, detailed, the big issue for those mooted start-ups has been getting a cornerstone investor.
“And the main challenge from those investors was the stability of the market and accepting the volatility,” she said.
“It seems like investors are focusing more on the existing platforms that are already in place. We've heard of teams that are ready to go, have their business plans in place, but they just can't find that cornerstone investor.
“It goes to show that investors start to think about where to put their money, the value is in brands and existing platforms right now,” Anchundia commented.
Andy Marcell, CEO of Aon’s Risk Capital and Reinsurance Solutions divisions, said there are many issues for investors backing reinsurance start-ups, with the main one being the exit strategy.
“You can put the money in, but how do you get it out?” he asked.
“Reinsurance start-ups are also competing with established carriers who are deploying more capital,” added Kathleen Reardon, CEO of Hiscox Re & ILS.
Industry investments continue
While reinsurance start-ups may struggle to attract investor backing, capital is still flowing into the industry, although it is being directed toward other areas of the market.
“Investor interest remains strong,” said Reardon, highlighting the ILS market, especially for catastrophe bonds, as well as traditional reinsurers that have secured funding through capital raises.
“Catastrophe bonds offer liquidity, providing efficient entry and exit that investors value. However, many investors currently find other opportunities more attractive than backing reinsurance start-ups.”
Reardon also pushed back on the suggestion that reinsurance does not provide investors with diversification benefits, particularly when it comes to ILS.
“ILS offers investors diversified returns that do not correlate with the rest of their portfolios,” she explained, adding: “The ILS product has matured significantly.”
She continued: “The ILS market as a whole has improved its collateral release process, offering investors a more mature and refined product.”
Aon’s Marcell also said there remains plenty of interest from investors to support cat bonds, sidecars and the like.
And he also highlighted interest in supporting insurance companies – and in particular E&S-focused operations – which, generally, have higher valuations than their reinsurance counterparts, and so have been garnering greater focus from investors.
While private equity’s interest in reinsurance may currently be limited, it continues to support companies in other areas of the industry.
“The PE firms have largely been investing in fee businesses at scale, for some time,” said Marcell.
“Part of the issue for PE firms who have invested in retail brokers and MGAs is actually how do they now exit?” he said.
The cost of debt is a problem, Marcell said, as it means their ability to sell to another private equity firm “is severely limited”.
As a result, PE firms are left with little choice but to either hold on to their investment, which, as Marcell explained, “none of them really want to do as it's not part of their raison d'être”, or they have to undertake an IPO.
“And to do an IPO, you've got to actually make money, you’ve got to have an organised structure, you need governance, and you have to have profitability. And that is a challenge for many,” the broking executive said.
SiriusPoint’s Egan highlighted how several recent mooted IPOs have been pulled owing to limited investor appetite as an example of those challenges.
“There's a glut of privately owned companies, some of which have come to market, but not that many. Some of those that have gone to market [to IPO] have had to pull their horns back in again and go away and rethink,” he said.
“That's putting investors off, because that new PE money wants an exit, and if the markets, even at the moment, aren't showing good exit potential, then that puts them off as well.”