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New capital is flowing into the insurance industry, but this is not 2001

Catastrophe losses, casualty reserving holes and the coronavirus pandemic are creating fertile ground for capital raising and new insurance companies.

But analysts say the current environment is different from previous periods of similar activity, such as the hardening markets that followed the Sept. 11, 2001, terrorist attacks and the 2005 hurricane season, and there may not be a similar wave of startups.

Prices have risen sharply for many types of insurance, particularly reinsurance and specialty insurance, in response to the combination of pressures. Ainsley Mayhew Seers, an insurance partner at PwC, said in an interview that now was "arguably the most interesting time we have had for a generation to look at deploying capital" in the insurance market, both because of rising rates and the availability of teams and executives.

One of the compelling features of the current environment, Mayhew Seers added, is that because of the uncertainty around coronavirus claims, for example, the hardening could continue for some time. "Many people will be taking the view that this is a pretty robust hard market and there's probably a bit more to go."

Talk and action

Since the beginning of May, publicly traded companies Hiscox Ltd., Beazley PLC, RenaissanceRe Holdings Ltd. and Lancashire Holdings Ltd. have raised roughly $2 billion between them from share issues, and privately owned Fidelis Insurance Holdings Ltd. has raised $500 million from existing shareholders, plus $300 million in senior debt. In addition, Starstone U.S. Holdings has undergone an $630 million recapitalization backed by private equity and management.

This activity could tempt more firms to raise capital. Mike Van Slooten, head of business intelligence at broking group Aon PLC's reinsurance solutions division, said RenaissanceRe's move in particular could make its peers take notice, as it is among the most highly regarded reinsurance underwriters.

"There is clearly something that they see that gets other people thinking: Maybe I'd like a piece of that action as well," Van Slooten said in an interview.

Alongside the capital-raising activity, talk has started to emerge about plans for new insurers. The Insurance Insider has reported that Richard Watson, former chief underwriting officer of Hiscox; Martin Reith, former CEO of Lloyd's insurer Neon; and Dinos Iordanou, former chairman of Arch Capital Group Ltd. have startups in the works.

Speaking to S&P Global Market Intelligence in the run-up to the June 1 Florida property-catastrophe reinsurance renewals, Rob Bredahl, president of insurance and reinsurance broker TigerRisk Partners LLC, said the company was involved in "a number of projects" to bring new catastrophe capital into the market "in the form of new companies as well as sidecars and ... the scaling up of existing companies."

He added that most of the money was targeting the Jan. 1, 2021, renewals, although a number of the projects were gearing up to be able to provide backup cover if there is an active North Atlantic hurricane season.

Stephen Catlin, co-founder and CEO of new insurer and reinsurer Convex Group Ltd., said in a May interview that he and fellow co-founder Paul Brand "would both expect, and almost hope ... to see other new startups coming through as you saw post-9/11, as you saw in 2005."

A different world

But today's situation is different from those years, analysts say. Despite recent challenges, there has not been a string of failing companies, as there was in 2001.

"It hasn't been a bloodbath with insolvencies and companies getting into deeper trouble," Brian Schneider, a senior director at Fitch Ratings, said in an interview.

Van Slooten said the companies currently raising capital are in good shape, and the industry "is a lot more resilient now" because of efforts to manage exposures and downside risk. "I'm a bit skeptical that there will be too many brand new rated startup companies," he said, adding that there "might be one or two."

Schneider predicted that current capital-raising efforts would focus more on scaling up and repurposing existing companies.

"I don't expect the startups to really dominate this capital raising," he said, adding that he expects "maybe a handful" of true startups, "not a huge wave, like what we may have seen after, say, 9/11."

In addition to the complexity of setting up from scratch, Van Slooten said new companies' challenge is attracting business. Reinsurance tends to be "sticky" as buyers and reinsurers build up relationships over many years, making attracting business challenging. In addition, buyers have whittled down their reinsurer panels over the years, he noted.

Schneider said pure startup activity may be limited because of the difficulties faced by new companies in previous waves of activity. "Not all of the 2005 startups did that well compared to the 2001 startups," he said, adding that some companies formed in 2008 and 2011 "never really got anywhere."

Companies now also need bigger capital bases, Van Slooten said.

"The price of a ticket to the game is that much higher these days. If you have got less than $1 billion of capital, you are going to struggle, I think, with a lot of buyers," he said.

However, Van Slooten also cautioned that the North Atlantic hurricane season is "the big wild card at this point." He added that although there was some scope for capital raising and startups now, a big hurricane loss or series of losses on top of existing pressures could "create quite a significant opportunity."