What will it take for investors to return to reinsurance?
Broking legend and straight-talking New Yorker, Tony Ursano features on the latest episode of Mark Geoghegan’s Voice of Insurance podcast.
The latest Voice of Insurance podcast is a useful tonic to the sometime tendency among insurance and reinsurance professionals to be inward looking about the sector, viewing it in splendid isolation, rather than in a broader investment and economic context. Because from an outside investor’s viewpoint, the industry has been struggling to generate interest.
For property and casualty (P&C) reinsurers, stronger rate dynamics are beginning to mend the sustainability of pricing. Still, the industry wants to attract outside investment from capital markets in order to continue to grow its books, while hoping to keep hold of some of those pricing gains.
“Overall, investor sentiment has definitely improved for now. The ‘for now’ is an important point that I want to come back to,” says Tony Ursano, managing partner and co-founder of Insurance Advisory Partners.
A veteran Wall Street deal-maker and reinsurance broker, Ursano is a former CEO of Willis Capital Markets and Advisory, and a former president of reinsurance broker TigerRisk. His career has focused on making the connections between insurance and the global investment community, creating a nexus for many big mergers and acquisitions deals in the past few decades.
He believes a combination of factors – better pricing, tighter terms and conditions, better investment conditions and steady economic growth – will contribute to the industry’s attractiveness, he explained.
“I think it’s given both specific insurance investors and other more generous investors hope that P&C has a chance to outperform the broader indices,” Ursano said. “If you look at the S&P P&C index, it’s trading on average at about two times book value, compared to its 10 year average of one-and-a-half…reflecting positive sentiment and an expectation that earnings and returns are going to be good.”
Likewise, broker profit margins are also better than usual. He highlighted that brokers are more profitable in 2023 than the decadal average (19x Ebita, versus 15x, on aggregate).
Several years of inadequate pricing combined with high catastrophe losses scared away many reinsurance market investors from the capital markets, pension funds, etc, with more reliable returns available elsewhere.
“Investors are wary of volatility, and they’re wary about whether or not the market will maintain its pricing discipline. The industry’s earned a return on capital lower than its cost of capital for a long time. And at the same time, the world continues to become a riskier place,” Ursano said.
He reeled off an impressive list of emerging risks that insurers must be careful about in risk selection and pricing, including the pandemic, climate change, cyber, autonomous vehicles, geopolitical instability, the war in Ukraine, inflation and rising interest rates, supressing any gung-ho investor instincts and further contributing to a wait-and-see attitude.
“And importantly, the unknown, what’s lurking out there, that we haven’t accounted for,” he continued. “It’s something that investors are going to watch very carefully to make sure that the industry has sufficient discipline to get the returns that it deserves for the really important societal benefit of resiliency it provides. The sentiment is good for now. But I think investors are watching very closely.”
There are signs of investor interest, Ursano noted, in Bermuda reinsurers and the catastrophe bond market, areas he knows well.
“We’ve seen around $5bn of new capital come into the market between RenaissanceRe and Everest, Ariel and Beazley, Ark and Fidelis and others,” Ursano said, noting that in RenRe’s case the capital was to fund its purchase of rival Bermudian carrier Validus.
“But most of that capital is available to be deployed into the hard market. And I suspect we’re going to see more of that both in terms of follow-on transactions and IPOs. We’ve seen capital come into the cat bond market, and we had the strongest first half of cat bond issuance ever, and overall ILS capital top $100bn,” Ursano said.
To some degree, the hard market rally in reinsurance rates has been made possible because the lack of outside interest in the sector – in terms of underwriting capacity – is constraining the supply of capacity in play, while demand among reinsurance buyers has been high – leading prices to rise and stay firm. Ursano alluded to this relationship.
“You have to believe that each incremental dollar that flows into the market gives the investors pause as to where is the tipping point: at what point is the amount of capital that’s coming in going to kill the golden goose?”
Investors are being discerning between the different players in this market, he suggested, putting onus on re/insurers to showcase their quality in underwriting decision-making.
“So far, the companies that have been able to raise capital and size are very high quality companies. That’s where the market has discerned who they’re willing to bet with in this hard market, versus who they’re still waiting to see.”