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Soft market stems flood of new capital

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MONTE CARLO, Monaco — Despite Aon Benfield's less optimistic guidance on the growth of insurance-linked securities, those on the sidelines of the Rendez-Vous de Septembre remain bullish on ILS growth even if it's more slowly than recent years.

The unit of Aon P.L.C. now sees alternative capital hitting $120 billion to $150 billion by the end of 2018 instead of the end of 2017, Paul Schultz, president and CEO of Aon Securities in Chicago, said during a media briefing at the reinsurance industry's annual summit in Monte Carlo, Monaco.

While attendees at the Sept. 13-16 gathering took to heart the slowing forecast, most retained high expectations that capital will continue to flow into the reinsurance sector.

“There's nothing we see on the horizon that would indicate the interest from investors is going to wane,” said David Priebe, New York-based vice chairman of Guy Carpenter & Co. L.L.C., a unit of Marsh & McLennan Cos. Inc. “We think it will continue to grow.”

Catastrophe bond issuance remains strong, and alternative capital totals about $60 billion, or about 18% of the global property cat reinsurance capacity, said Brian Schneider, a senior director at Fitch Ratings Ltd. in Chicago.

Such capital is less and less an “alternative” way of doing business and has become more mainstream, he said.

“We shouldn't call it alternative. It's capital,” Mr. Priebe said.

“Is it embedded in a rated balance sheet, or is it in a special-purpose vehicle that is more fluid, being dedicated to a certain set of exposures, that is there to support that risk? Once the need expires, it is either returned to the investor or reinvested in another risk,” he said.

“Capital has always come into the system. What is new is where the capital is coming in,” said Jay Nichols, CEO of Axis Reinsurance Co. in Zurich.

“Pension funds, hedge funds and private equity funds historically participated in the insurance industry through the ownership of insurance or reinsurance stocks,” Mr. Nichols said. “So, they were in the business all along, but they just came in through a more traditional way.”

“What we are seeing today is a shift in the way that capital enters the system,” he said.

“I like the word converged,” said Brad Adderley, a Bermuda-based corporate partner at offshore law firm Appleby. “It's all being converged now. I think of it as part of the same pool.

“Whatever colloquialism you use, basically, it's all capital, and I don't think people think of it as alternative anymore” Mr. Adderley said. “It is looked at as being one melting pot now; it's just a question of where does the business get written.”

“The fundamental shift is that reinsurance — not just reinsurance stocks — is now an asset class. This is new and creates a host of new dynamics that are more consistent with being an asset class versus the historical classification,” Mr. Nichols said.

“Third-party capital is still coming in; it's just the rate of entry is starting to slow a bit and that shouldn't surprise anyone,” said David Flandro, global head of analytics at JLT Re. “There's still capital coming in — more than is going out — but it's just moderating a bit.

“Third party capital can still grow; it's just not going to grow as much as a proportion of the whole in the next couple of years than it has over the last three years,” he said.

“I think we all agree that the upper number (of the Aon Benfield forecast) will be hit. I don't think there's a doubt in anyone's mind. The question is: When?” Mr. Adderley said.

Growth, however, may take longer than even the revised guidance.

“I'm not trying to suggest the segment has reached its maturity, but to see it doubling in three years when most market observers would accept that the main ILS focus is property/catastrophe, and where demand is relatively flat, unless there's going to be huge penetration into an already competitive primary market as well the international treaty markets, which I'm not sure for the latter we'll see at current pricing levels, I'd be surprised if the capital were to more than double during this period,” said James Kent, co-president of Willis Re Inc., and president of Willis Re North America.

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