Third party capital influx could displace $40 billion in traditional reinsurance equity capital: Willis Re

An influx of third party capital into the reinsurance market could lead to up to $40 billion of traditional equity capital being redeployed elsewhere in the insurance and reinsurance market, Willis Re said Sunday.

That third party capital could also be returned to shareholders, the global broker said in a release from the international insurer and reinsurer Rendez-vous event being held in Monte Carlo this week.

The current growth trajectory for third-party capital suggests it could make up as much as 30% of the global property catastrophe reinsurance market within a few years, representing about $100 billion of capacity, Willis Re.

“Discussions so far have centred on the effect third party capital is having on rates and the competition it is producing in the property catastrophe reinsurance market,” noted John Cavanagh, Willis Re’s CEO, speaking at a Willis event during the Monte Carlo conference.

“A future influx of $100 billion would, however, have a number of profound consequences. As third party capital enters the property cat reinsurance market, it is going to crowd out conventional equity capital,” he said. “That equity capital has to go somewhere.”

If $100 billion of third party capital enters the reinsurance market, then even allowing for significant returns of capital to shareholders, there could be as much as $20 billion excess equity capital to be deployed, according to Cavanagh.

“You could think of this as being the equivalent of 10 well-capitalized start-up companies, and the effect on the market place 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.”

As more third party capital enters the market, reinsurance buying patterns shift and the regulatory environment becomes more complex, the reinsurance market overall will see growing complexity, Wills Re argues.

“Solid analytical advice and market knowledge through intermediation is needed now more than ever,” Cavanagh added.

Also at the Monte Carlo Rendez-vous event, Tony Ursano, CEO of Willis Capital Markets & Advisory, said he expects a “very active capital markets mergers and acquisitions environment” for the rest of this year, going into 2014.

“On the capital markets side, we expect a very active cat bond calendar, including new and renewal sidecar financings, additional activity around new insurance-linked securities fund formations and strategic partnerships, as well as more new hedge fund sponsored reinsurers,” he said.

“We expect activity in the insurance M&A arena to be robust, driven by a number of factors. These include increased CEO and board level confidence derived from higher public valuations, a continued focus on growth, scale and diversification, private equity involvement as both buyers and sellers, and the gradual consolidation of the reinsurance sector driven in part by third party capital involvement.”