While levels of convergence capital have been substantial and are proving a welcome addition for primary players, the flood of new capacity will not sound the death knell for traditional reinsurance.
That is the view of Ben Walter, CEO of Hiscox USA, who said that “as a net buyer of reinsurance, the influx of alternative capital has been great for us because it has brought the price of reinsurance right down”, and helped to drive competition within the reinsurance market in the US.
“We have seen rate pressure and people competing for capacity, which has driven down pricing. Convergence capacity has the potential to do more of that,” said Walter.
However, Walter said, the upside for insurers is “limited” and a plateau in institutional investor interest may already have been reached. “I don’t think the capital markets money that is coming in is stupid money, it’s smart money and we’re already beginning to see them pull back as they start to see the rates coming down.”
Institutional investors are increasingly worried about being unable to put money to work efficiently, he said, adding that the current influx of capital is unlikely to “trash the market”.
“After the introduction of RMS 11 there were a couple of flush years, so it should really be no surprise that there will be some pressureon margins,” he said, and was circumspect about the rate environment facing the industry.
On the group side, Walter said that Hiscox is well positioned through its existing relationship with Third Point and through its new Kiskadee sidecar to work with third party capital. “We have more options in the third party space than a lot of the competition.”
Turning to M&A in the US market, Walter said that he sees “current valuations as ludicrous, with companies going for crazy multiples of book value”. He had seen companies pursuing acquisitions where they were paying a much higher premium on book than they themselves were achieving, “raising questions about how they afford such strategic moves”.
Hiscox has a bias towards organic growth, he said, but would consider potential deals. He added, however, that he “has not seen anything even remotely well priced recently. There is just too much capital chasing too few deals”.
convergence capital, Hiscox