Brokers buck industry capital issuance trends amid growth opportunities
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Brokers buck industry capital issuance trends amid growth opportunities

The industry is mostly reluctant to raise capital with high interest rates, except for brokers.

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Insurance and capital are interlinked and vary depending on sector-specific and macroeconomic factors. Capital is needed to set up new segments, grow existing businesses and acquire other entities.

However, capital is not free, and companies must constantly monitor the cost vs the long-term return on capital. Growth is easy but profitable growth is hard, and profitable growth that exceeds the cost of capital is even harder.

The past few years have seen an unprecedented shift in interest rates, forcing insurance companies to take a balanced view on raising capital vs deploying it effectively. This raises the question of how the P&C insurance companies have reacted to this shift.

Our analysis shows that P&C companies issued roughly 29% less capital in H1 2024 compared to H1 2023 – $14.7bn in H1 2024 vs $20.6bn in H1 2023.

This could result from these companies already having excess capital and waiting for a more favorable rate environment to deploy it.

Some interesting takeaways for the past six months and recent trends in general include:

Commercial – Despite often discussing strong pricing and opportunities, commercial lines carriers’ appetite for capital has decreased following significant raises during the low-interest rate years of 2019 to 2021.

Reinsurance – Capital issuance for reinsurers was minimal for the first half of 2024 and far smaller than the amount last year. This could be due to lower industry catastrophe losses in 2023 vs 2022, limiting the need to raise capital. Additionally, recent mid-year renewals report slightly disappointing pricing, potentially limiting reinsurers' desire to grow.

Brokers – The largest issuers of capital in the past year were the brokers, in contrast to the normal pattern of carriers issuing the most. The “supercycle” stretches on, while consolidation opportunities continue.

InsurTech – InsurTechs have raised very little capital so far in 2024, continuing their trend of issuing less capital over the years when compared to larger amounts in the 2010s.

The chart below details capital issuance in the P&C industry by type since 2013.

h2 1 sec type.png

The opportunistic pattern of capital issuance is illustrated above. Issuance fell as interest rates rose into the late 2010s, and then it increased rapidly during the Covid-19 pandemic as rates fell back to zero.

With the Fed continuing in its efforts to control inflation via contractionary monetary policy, the cost of capital has risen. As a result, capital issuance by insurers has continued to fall. However, it’s interesting to note that we still haven’t hit the lows seen in 2017, when rates were at a relatively low 0.5%-1.25%.

In terms of the make-up of the capital issued, recent years have seen a decline in the importance of issuing preferred or common equity and the complete disappearance of subordinated debt as a means of capital issuance for P&C insurers. In their place, senior debt remains an important source of raised capital, while short-term bonds and rounds of funding (labeled “other”) have been on the rise since the pandemic.

Typically, senior debt has a lower cost than subordinated debt, which also signals the stability of this industry.

The chart below presents the same trend in a different format, breaking capital issuance down by segment rather than security type.

h2 2 segment new.png

Here, we can see an interesting trend emerging. Until around 2021, the greatest amount of issuance came from primary carriers. In the past few years, however, carriers have taken a back seat relative to the increasing issuance from brokers.

While the amount of capital issued by the P&C industry has fallen as interest rates have increased, the opposite is true for brokers. Brokers issued more in 2023 (with rates around 5%) than in 2021 (with rates at 0%), and they have already issued more in the first half of 2024 than they did in the entirety of 2020.

This is because brokers are still benefitting from new market opportunities including continued consolidation, as discussed at our Insurance Insider US New York City Conference 2024 held last month. As panelists noted, there is a “never-ending thirst” for scale among brokers.

The chart below shows the H1 2023 and H1 2024 trends.

h us pc ind segment last two years.png

xDespite already being a relatively small portion of industry issuance, capital issuance from reinsurers has dropped significantly compared to last year.

The following chart shows the top 10 firms by the amount of capital issued each year, broken down by the type of security.

select companies with large capital issuances IPCD REDO july 9 2024.png

Most of the top 10 lists are made up of brokers, which is to be expected given the aforementioned trend of brokers taking on the majority of P&C capital issuance and continuing to focus on consolidation.

In summary, the Fed dictates the cost of capital. Recent job growth trends have stymied the Fed’s attempts, but the last jobs report pointed to some softening, which has ramped up the likelihood of a 25-basis point rate cut in September.

Overall, apart from insurance brokers who will continue to raise capital as needed for M&A opportunities, the rest of the P&C space will have less need for new capital as pricing continues to move down slowly.

Recent reserving challenges will also lead to the industry carefully re-evaluating the quality of the new business written in the 2021-23 accident years. This could also compress growth expectations, translating into less need for new capital.

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