Jarad Madea on capital discipline, MGA growth and a more flexible reinsurance market

"I think there is still absolutely positive returns exceeding the cost of capital for most investors... these investors have now been through the cycle a number of times, and they have good discipline to them."

Jarad Madea, CEO of Howden Capital Markets & Advisory, joined Sophie Roberts of AM Best TV at the Rendez-Vous de Septembre in Monte Carlo to discuss how investors are approaching reinsurance, the continued growth of managing general agents (MGAs) and the role of private equity in the sector. 

His message was clear: capital remains attracted to reinsurance, but investors are becoming more disciplined about how, when and with whom they deploy it.

A more flexible model for capital

Sidecars and catastrophe bonds are changing the way investors participate in reinsurance. Rather than committing capital through traditional balance sheet formations, investors can enter when market conditions are attractive, reassess their position and adjust as the cycle develops. 

Jarad described this as a form of “just-in-time capital”.

“The sidecar and cat bond structure has allowed the market to almost have a sense of just-in-time capital. When the market needs it, these investors are able to come in for a shorter period, evaluate the pricing a year later, and decide whether they want to play again.”

That flexibility can support greater discipline. But Jarad also emphasised the importance of long-term relationships, with investors increasingly focused on finding partners they can work with across market cycles.

MGA interest remains strong

Investor appetite for MGAs also remains a significant feature of the market. 

Jarad pointed to sustained interest across both public and private markets, supported by private debt capital. For investors, the search continues for differentiated MGAs with the potential to growl.

"There's probably not a week that goes by that we don't talk to an investor eagerly looking to invest and find the next MGA. Fuelling both of that, the private debt markets have been very supportive of MGAs and backing them, which helps drive valuations."

Reserving is shaping transactions

Casualty reserving and social inflation remain central to insurance M&A discussions.

Jarad highlighted reserve adequacy as a critical consideration in whether transactions can proceed. Where buyers and sellers have different views, structures such as earn-outs, loss portfolio transfers and adverse development covers can help address the gap.

"The number one question is the adequacy of reserves in these businesses, and it will impact whether a deal gets done at all. If there's no alignment from the seller and the buyer on what that reserve adequacy may be, we're probably not going to see deals happen. That's why we've structured our team to closely coordinate an M&A transaction with the possibility of a legacy liability transaction, whether that's an earn-out, a loss portfolio transfer, or an adverse development cover."

This is driving closer coordination between M&A and legacy liability solutions as buyers and sellers look for structures that can make transactions work.

More investors are joining the conversation

Monte Carlo itself offers another sign of how the capital base is changing.

Jarad noted a marked increase in participation from private equity firms and other end investors compared with only a few years ago. Pension funds, asset managers and family offices are also becoming more active participants in conversations around insurance and reinsurance capital.

"It goes back to that just-in-time capital point. We can bring capital in when the industry needs it and deploy it out when the industry has abundant capital."

Watch the full interview with AM Best TV here: http://www.ambest.com/v.asp?v=madea926&AltSrc=182