Influx of alternative capital may displace existing capacity

The influx of third party capital into the reinsurance market could displace up to $40 billion of traditional equity, with the capital likely to be either returned to shareholders or deployed elsewhere.

That was the view of John Cavanagh, CEO of Willis Re Global speaking at the Willis Re press conference in Monte Carlo. He said that while a significant amount of capital would undoubtedly be consumed by share buy-backs, the remaining capital would be sufficient to create 15 well-capitalised reinsurance start-ups.

“The effect on the marketplace would be profound,” he said.“If capital is redeployed, much of it could go into direct insurance businesses. Many of the hybrid specialty reinsurers are already implicitly going down this path,” he said.

Willis Re estimates that alternative capacity could account for around 30 percent of the global property catastrophe market within a few years, representing $100 billion of traditional equity. The trouble is that if conventional equity capital is “crowded out”, it has to go somewhere, Cavanagh said.

Cavanagh added that reinsurers are also facing changing reinsurance buying behaviour. He said that buyers of reinsurance have grown increasingly sophisticated and are now considering their purchases at the c-suite rather than the operational level.

This approach means that cedants are increasing looking for portfolio solutions, rather than simply by line, which is encouraging reinsurers to take a more holistic approach to their relationships. It is also encouraging reinsurers to pay increasing attention to analytics as a means to deliver risk solutions to clients, he said.

Addressing prospects for M&A, Willis Capital Markets and Advisory CEO, Tony Ursano said that Willis expects a “robust level of activity” into 2014. M&A is very much a “confidence game,” he said, with shareholder interest both as acquirers and acquirees helping to buoy interest in transactions.

Ursano said that market was “one deal away” from a burst of M&A activity, with private equity interest helping to drive deals at multiples to book value. Limited opportunities in the capital markets had certainly helped. He added that he was excited about prospects for the balance of the year, with an uptick in M&A activity a distinct possibility.