Hardening Conditions Drew Capital to London, Bermuda Markets in 2020

Existing insurance companies and start-ups in the London and Bermuda markets attracted capital in 2020, both to bolster balance sheets and to take advantage of perceived improvements in pricing and conditions, according to A.M. Best.

Expectations of a broad market hardening as well as insurers' and reinsurers' desire to bolster balance sheets as they confront uncertainty over COVID-19-related losses drove much of 2020's capital-raising activity, according to a recent Best's Special Report titled "London and Bermuda Attract Capital as Market Conditions Improve" (February 24, 2021).

Private equity, industry capital, and public placements all contributed to the capital inflows to London and Bermuda insurers, Best says, with investors attracted to the market by improving conditions in a broad range of sectors in both the primary insurance and reinsurance markets.

According to the rating agency, the capital inflow to the London and Bermuda markets reflects the absence of other opportunities for investors as a low interest rate environment is forcing institutional investors and others "to look further afield for yield opportunities." In that environment, the risk and reward calculation presented by the insurance industry in a hardening market might be attractive to both existing and new investors, Best says.

"Bermudian and London market insurers have been able to raise equity with relative ease," the Best report says. "They have also been able to issue debt at relatively favorable rates, in spite of higher credit spreads." Those conditions suggest investors have confidence in the insurance industry's near-term prospects, despite claims uncertainty over COVID-19, social inflation, and catastrophes, the report says.

The report suggests that while the new capital's impact on market capacity "is not insignificant," Best believes it doesn't represent a material addition to industry capital. Still, the new capital flowing into the industry could dampen price increases, Best says, though noting that there are other "moving parts" that could influence insurance and reinsurance prices.

"A portion of the additional capital raised in 2020 has already been required to absorb adverse prior-year loss reserve development and upward revisions in COVID-19-related loss estimates," the report says. "And the extent to which losses related to COVID-19 have been recognized by insurers going into 2021 remains unclear."

For reinsurers, rising demand from insurers with constrained financial positions due to underwriting losses and the impact of asset market volatility due to COVID-19, coupled with a reduced supply of retrocessional coverage, could offset the impact of the flow of capital into the segment on reinsurance supply, the Best report says.