Welcome to this special report, detailing the insightful and sometimes challenging conversation and debate that took place at a roundtable discussion on Bermuda’s reinsurance industry.
Held against the backdrop of the economic disruption caused globally by the COVID-19 pandemic, the discussion examined the implications for Bermuda’s reinsurance industry and the opportunities that may also emerge as a result.
The roundtable examined how Bermuda has an important role to play in the response of the risk transfer markets globally—and in terms of assisting the world to recover from the economic effects of the pandemic.
The roundtable was attended by senior leaders from Bermuda’s reinsurers and institutions who help shape and regulate that industry, including the Bermuda government and the Bermuda Monetary Authority. The executives offered insightful thoughts and debated opportunities and solutions during the session, leaning on the expertise and infrastructure that Bermuda has wrapped around its risk transfer industry.
Window of opportunity
The challenges stemming from the COVID-19 pandemic represent a window of opportunity for Bermuda again to innovate and lead from the front when it comes to moving the industry forward—as it has so many times before.
From the creation of the first captive to solving the liability crisis in the mid-1980s, to leading the way in the development of the insurance-linked securities sector globally, Bermuda has always been at the forefront of moving risk transfer solutions forward.
It has also been the centre of gravity for new capital entering the market on the back of changing market conditions, capacity crises and hardening rates.
The hard market the industry is currently experiencing is no different—new money has already flowed into the industry, much of it into Bermuda. And there looks likely to be a lot more to come. The roundtable examined how that money might be put to use and why Bermuda has remained the hotspot for attracting new capital.
The reinsurance industry will once again respond and reinvent itself in the midst of the challenges presented by COVID-19, which has come on the back of several years of additional challenges for the industry including high cat losses and a widening hole in casualty reserves.
Bermuda will again be at the heart of this process, and this roundtable examines exactly what that might mean.
BERMUDA’S RESILIENT REINSURERS
“The market continues to be resilient and this has only been reinforced by our response to COVID-19.” Adria Richards.
Adria Richards: We’re facing several years of big cat losses. 2017 and 2018 were the largest two consecutive loss years for insured natural cats in history, and 2019 was not without challenges. During this period, the Bermuda market has performed very well.
The market continues to be resilient and this has only been reinforced by our response to COVID-19.
We’ve stayed open for business, supporting our clients and paying claims. 2020 looks likely to be another record-breaking year, and at the same time, we’re all grappling with the new challenge in COVID-19. That has brought with it a lot of uncertainty, from a loss estimation perspective, as well as operational challenges. But as a market we’ve continued to function at a very high level.
At RenaissanceRe we’ve turned our attention towards future opportunities that we think will arise as a result of COVID-19. We have recently raised some capital and we have a strong balance sheet that will enable us to further support our clients during these unprecedented times. Again, off the back of several big cat losses, the market continues to be extremely resilient.
“As a result of the hardening market we’re seeing a number of new reinsurance startups, which is very exciting.” David Brown.
David Brown: The Bermuda reinsurance sector continues to be very strong, with strong balance sheets. Certainly, the catastrophe events of recent years have been primarily earnings events. Capital has remained strong. Related to COVID-19, it’s too early to determine the long-term impact, but the industry appears to be in very good shape right now to weather the storm.
As a result of the hardening market we’re seeing a number of new reinsurance startups, which is very exciting, in the traditional reinsurance and insurance space as well as in the insurance-linked securities (ILS) space. All of those are forming in Bermuda, which is good for Bermuda.
There’s a number of reasons for that—obviously our history in helping new capital enter the market quickly is very important in these times of uncertainty and when the cycle changes. Bermuda has been a leader in moving quickly to identify these opportunities. We continue to be viewed as a reputable jurisdiction with the highest standards on tax transparency and a strong regulator in the Bermuda Monetary Authority (BMA), which continues to be very important.
I am very bullish and we think it’s the best place to start a reinsurance business.
“We see an abundance of new capital coming into Bermuda through existing players and new formations and no bottleneck at the BMA.” Brad Adderley.
Brad Adderley: First, there was the question of whether through COVID-19 the BMA would grind to a halt. If there would be issues around reviewing applications and so on. But what we saw was the opposite.
We are seeing new formations with the BMA approving large transactions on the life space, the ILS space—as well as some other interesting startups. Meanwhile, several established reinsurers have raised additional capital, which shows faith in the reinsurance marketplace and faith in Bermuda.
We see an abundance of new capital coming into Bermuda through existing players and new formations and no bottleneck at the BMA, which is great.
On top of that, in the ILS space, we are seeing a whole slew of new cat bonds and transformer vehicles being brought to market. Around 80 percent of cat bonds globally are still domiciled in Bermuda.
So, all through COVID-19, we have seen new capital, new startups and new cat bonds form in Bermuda. And by Christmas I think we will see even more. And they’re all talking about Bermuda and not looking at other jurisdictions. They are looking at being based in Bermuda and raising capital for Bermuda.
“The regulator has done a tremendous job to differentiate Bermuda’s speed to market and it’s encouraging for the industry.” Sean Kelly.
Sean Kelly: The capital we were seeing coming into the market in the back half of 2019 has continued to come in through 2020, and every group that I’m speaking with about a potential new startup has a Bermuda element in its strategy. Whether it’s UK-based or US-based, everybody is looking to establish a Bermuda company as a component of that, in part because they see that as the quickest path to the market for January 1, 2021.
The regulator has done a tremendous job to differentiate Bermuda’s speed to market and it’s encouraging for the industry.
The accident years 2017/18 were touched on already—they were the first significant loss years for a large number of ILS investors, yet you’re still seeing capital come into that market. To me, it demonstrates that the industry in Bermuda is trending in the right direction, and the market is very well positioned heading in 2021.
“It has been a very good representation of Bermuda during COVID-19. This has resounded with clients and within the industry.” Gavin Woods.
Gavin Woods: The BMA has done a sterling job over the past couple of months. The questions we get most from onshore legal counsel and the industry are ‘will the BMA be able to cope?’ and about what the response time is like. The answer to that is the BMA has been on the ball throughout and they have been exceptionally responsive in a very difficult time.
It has been a very good representation of Bermuda during COVID-19. This has resounded with clients and within the industry.
“We’re definitely in an uncertainty mode, but the nice thing about it is that we have new capital coming in.” Andre Perez.
Andre Perez: The fact that we have existing companies raising significant amount of capital is encouraging. Investors are understanding that certainly on the casualty side we have started to respond in the form of a hard market.
For those of us who have tried to place some D&O insurance, you know what I’m talking about—it is tough. So it definitely is encouraging that there is more capital. The elephant in the room is obviously COVID-19 and the uncertainty around it.
There is no doubt the loss is going to be significant. There is still a lot of uncertainty on the interpretation and the coverage, and that’s not only on the casualty side but now it’s seeping also on the property side with business interruption.
We’re definitely in an uncertainty mode, but the nice thing about it is that we have new capital coming in. We have new companies being formed; on the ILS side the opportunity is slightly different because it’s focused on the property side but that capital which was on hold in March and April is now coming back.
Every single project we put on the backburner in March and April has now resumed and they’re full on. That gives us a lot of enthusiasm and hope for the future of this market. And let’s not forget we have hurricane season to come.
2021 is going to be a very interesting year in terms of what the market is going to be. But all in all, I would say that Bermuda remains a jurisdiction of choice. Just look at some of the new ventures that are setting up. They chose Bermuda because it’s the best place to start a reinsurance company.
“Let’s hope we don’t have a big event as, if we did, there’s going to be a lot more unknowns and a lot more uncertainty.” Kathleen Faries .
Kathleen Faries: It is going to be interesting if we do in fact have any big cat events. We’re still in the middle of this pandemic and it’s hard to see the end point of what’s going to happen. But if we do have a big cat event, what does that mean for how we’re going to handle claims adjusters? Will claims adjusters be willing to go where the event has happened? Are they going to be worried about their own safety?
There’s going to be layers and layers of complexity, so let’s hope we don’t have a big event as, if we did, there’s going to be a lot more unknowns and a lot more uncertainty.
It’s been amazing to watch everybody in Bermuda pivot and adjust to what we’re doing now, working from home. It has been very challenging for people who work and also have young children.
It’s going to take us a long time to say ‘this was the impact’, but it has been amazing to see how people have pivoted and we’re using the technology that Bermuda has been pushing and getting ready for people to use, so that’s all positive.
There’s still a lot of unknowns about how this will all shake out and what the final impacts will be but there are many positives for Bermuda at the moment.
“I’ve been really very impressed with not only our firm, but the reaction of the community and our industry.” Daniel Malloy.
Daniel Malloy: At Third Point Re, we’ve spent the last two-plus years building a stream of underwriting profitability as well as investment returns. So we’re pretty excited about the Sirius transaction [a merger between Third Point Re and Sirius Group]—there are a lot of positives. One of the positives again is how responsive the BMA has been.
We’ve been to the BMA a number of times this year, and we’re very pleased about how quickly they were able to organise meetings, often on short notice and how professional and supportive they’ve been.
We’re a company of 35 people, 25 of them in Bermuda. We were set up eight years ago and our disaster response was really geared toward working from home after a hurricane. So we’re fortunate in that while a disaster really did occur, although our response is geared to a different nat cat, the effect has been the same.
We reopened our office three weeks ago and two people have come in. We’ve had two board meetings, we’ve issued two earnings, we’ve filed with the SEC, we’ve talked to investors. We’ve done an acquisition, and then done the day-to-day business with people were doing it from home.
One of the very positive things for Bermuda was the sense of community and the coming together during this time. We’ve taken steps to help others in the community through some charity initiatives—and all this has occurred at a time of increased social sensitivity to racial equity with the Black Lives Matter movement.
I’ve been really very impressed with not only our firm, but the reaction of the community and our industry. It’s something we can be proud of. Everybody has stepped up and said: ‘I’m willing to recognise there’s an issue’. We have been working as a business community to foster diversity, equity, inclusion.
“We have to cater for both types of investors and provide bespoke solutions for both traditional and alternative capital.” Anup Seth.
Anup Seth: We have certainly seen Bermuda respond in a very positive way. I would add that it’s all about access to capital and ensuring the efficient deployment of that capital. We’ve seen an increasing number of enquiries around accessing the reinsurance markets or the capital markets.
The cat bond market had a very successful start to the year. Then we experienced a very volatile equity market in the first quarter due to COVID-19 that led to a slowdown in capital market solutions. However, it’s been remarkable how the market has bounced back in the second quarter and companies have increased their access to capital markets and issued further mortgage insurance bonds as well.
The industry now needs to demonstrate underwriting performance. We’ve had three to four years of poor underwriting performance. As an industry, we need to have several good years where we can demonstrate to investors that this is a good sector to invest in and that our risk-adjusted return is sustainable over a five to 10-year horizon.
There are two types of investors. There are investors who see our industry as a real business and we treat them as permanent capital. And you’ve got those investors who treat our business as an asset class and they’ll play only when the rates and returns are there, and will pull out when they’re not.
We have to cater for both types of investors and provide bespoke solutions for both traditional and alternative capital. Bermuda is well positioned to facilitate the deployment of this capital in an efficient manner.
The other important change is the new licence class that the BMA has come out with: the collateralised insurance class. We have seen some good traction there and that’s a great practical example of how the BMA is innovating and bringing real solutions to the table.
It has been a very busy six months for us, and it’s been great to see how all aspects of our business are performing well, but it’s all centred around that theme of access to capital.
“I have seen teams and working groups pull together and be flexible to provide support when needed.” Ariane West.
Ariane West: The industry has done a good job of managing the challenges that come with large loss events, and shown growth in other areas aside from property catastrophe over the past few years, including, for example casualty and speciality lines. The ILS market continues to respond to investor appetite for well-priced risk.
With respect to COVID-19, the ability of teams and platforms to continue to serve counterparties and investors has been truly impressive. Despite the challenges, most people haven’t missed a beat, which speaks volumes about the talent and commitment of the people in this industry.
I have seen teams and working groups pull together and be flexible to provide support when needed, because we’re all coping with having our work and home lives come together and managing multiple obligations and demands on our time.
The ability to keep up that pace and execute on our objectives comes down to a sense of collegiality and team spirit, and a willingness to provide support within teams as well as across the table with the counterparties we work with. It has been a really great time in that respect.
INNOVATIVE BERMUDA ADAPTS TO CHANGE
“There is a significant focus on and demand for renewable energy investments.” Ariane West.
West: Many are expecting the recovery from COVID-19 and the ensuing economic downturn to look different from prior economic recoveries. It’s an opportunity to reset and innovate.
We were already anticipating a significant amount of infrastructure development, which is now likely to be bolstered by expanded government stimulus plans as well as the private sector, and insurance and risk transfer will have a key role to play in facilitating those significant investments.
My work in the area of risk transfer relating to renewable energy and supporting the grid transition is an example of this.
There’s been a lot of discussion about climate change, about the importance of supporting the carbon transition and there is a significant focus on and demand for renewable energy investments.
I’ve been fortunate to be a part of innovation to create solutions to support these investments in addition to and alongside traditional insurance.
“We’re just beginning to see the potential impact of the Digital Asset Business Act.” Kathleen Faries.
Faries: Bermuda has an interesting opportunity right now, mainly because of the great job that the community did in keeping COVID-19 at bay. If Bermuda can capitalise on that story to open up Bermuda to new investors and new opportunities it would be great.
The ‘Work digitally from Bermuda’ initiative is an amazing opportunity. It will help Bermuda get the attention of investors and people building companies and thinking about new innovative platforms. If we can get more people to Bermuda and show them the intellectual capital we have here, they’ll see the potential for themselves.
We’re just beginning to see the potential impact of the Digital Asset Business Act legislation and the digital framework we have been trying to build on here.
I’m involved in a fintech company that is looking to do digital insurance out of Bermuda including cat bond issuance. If we can build a digital exchange here we will give Bermuda exposure to an expanding base of capital and investors. Building a more liquid and lower cost cat bond market is an interesting initiative that we are uniquely qualified to execute on.
“Bermuda has always had a very strong P&C industry and we’re seeing that further strengthening now with the new startups.” Anup Seth.
Seth: I feel that Bermuda has a bigger role to play. And if it plays its cards right—and all the signs are that it will—it has a bigger role to play in the future. Bermuda has always had a very strong P&C industry and we’re seeing that further strengthening now with the new startups. We now have a very strong life or long-term industry as well.
The other industry worth mentioning is legacy or run-off. Many companies that focus on legacy or run-off business have established in Bermuda. It’s that capital efficiency play whether it’s a large portfolio transfer or commutation these companies are taking legacy reserves off balance sheets to free up capital for companies to pursue their core strategy.
There is also a vibrant ILS industry in Bermuda. Bermuda is now a multifaceted marketplace. COVID-19 is an unprecedented pandemic and after the human tragedy the economic and insurance impact are just beginning to unfold.
What we’ll see with COVID-19 is perhaps an inflection point and greater polarisation of our industry where we’ll see some companies do really well, particularly if their digital strategy is very strong, versus other companies that may not survive, particularly if the BI claims go the wrong way for them.
“For Bermuda to succeed it has to play a role now for those companies that have accelerated.” Anup Seth.
If you look at how the tech companies have fared over the last three to six months, since the March downturn, there has been a real acceleration of those companies that have a very strong digital strategy.
Apple recently crossed the $2 trillion mark, and the technology industry has emerged much stronger compared with the retail, hospitality or travel industries that are all struggling..
It is going to be a different new economy that emerges, and for Bermuda to succeed it has to play a role now for those companies that have accelerated. There was a comment by one of the tech CEOs that we’ve seen 20 years of accelerated digitisation in the last six months.
That’s a real opportunity for us, but what do we need to do now to ensure that we can build a framework, a business opportunity, a landscape for those companies that will want to come to Bermuda with their digital strategies going forward?
I don’t have all the answers, but I do see a different economy emerging and Bermuda has to look forward and adapt, and that will be the real positive opportunity for Bermuda.
“I’m very supportive of helping to participate in the next generation of what’s going to be going on there.” Daniel Malloy.
Malloy: For an industry that doesn’t necessarily grab the headlines the way tech does, it is amazing all the changes that have gone on in the last 40-plus years in Bermuda. And that speaks to the entrepreneurial tradition that runs deep in Bermuda.
We are really in an inflection point. My daughter is in New York and her boyfriend lives in London and they’re thinking about moving to Bermuda for a year. Both their firms have said they can work from home, and suddenly Bermuda starts looking attractive and creating the next inflection point.
We can not just bring in the class of 2020 here but need to create an ecosystem where different technologies and different people and different mindsets are all going to combine in a small community of 50,000 people to create a more diversified stream of opportunities.
I really admire the work that’s being done in Bermuda and I’m very supportive of helping to participate in the next generation of what’s going to be going on there.
Perez: Bermuda has always been known for being innovative. It’s always had the ability to adapt and be flexible. It’s the people and the infrastructure, but we’re also lucky enough to have a regulator that’s also open and flexible in terms of encouraging new business coming in.
We talk about tech and the sandbox that is evolving from an international business perspective. One thing that’s been very clear is that the Bermuda market is probably one of the best equipped and the best prepared markets to work remotely. People wanting to move here and the one-year permit sounds like a very attractive proposition.
“What’s the future of our local workforce going to look like? That’s something that we need to think about.” Andre Perez.
But what is the work force? What does the work force of the future look like and how does that impact the Bermuda economy? We’ve all done staff surveys as to who wants to stay home and who doesn’t, and it’s staggering the high percentage of people wanting to work from home.
But the next question is: ‘If I can hire the same person 2,000 km from here for a quarter of the price, why do I have them here?’.
It’s a double-edged sword. Part of the strength we have is the ability to fuel the local economy, and empower the local workforce, but if my workforce can work from home, then I’m not so sure I need to hire them on Bermuda.
So what are the incentives for people to be here? Sure, I keep a core here and my economic substance is important but this is now one of the future challenges that Bermuda is going to have to cross. How do you keep people here? How do you attract them and how do you keep them here in a way that makes sense?
The jury is still out about how many people are going to work completely remotely, what it’s going to look like in the future or whether it’s going to be a hybrid model, and for that Bermuda has always had the ability to adapt very quickly.
But if we extend our thinking, what’s the future of our local workforce going to look like? That’s something that we need to think about.
“We see it with commercial insurers that need to have executives in Bermuda making decisions.” Gavin Woods.
Woods: I will say that a lot of it is not necessarily within the control of Bermuda itself. For example, in terms of getting to and from the Island, air travel is key. We see it with commercial insurers that need to have executives in Bermuda making decisions.
Bermuda can do everything possible to show that it’s open for business, but some things might be outside of its control.
Kelly: I agree, it is a double-edged sword but Bermuda does have a track record of being able to innovate when it needs to, and we need to continue that going forward.
Brown: Coming out of the pandemic, Bermuda is open for business and we’re going to be there to pay claims and help companies get back on their feet, the things we’ve always done.
There are going to be some opportunities, and Bermuda is probably uniquely positioned as far as new coverages or new exposures that are brought on by the pandemic and obviously in the ILS industry here, so I believe they may play a key role in some of the exposures brought on by the pandemic.
When we look at it from an industry perspective, there’s a seismic shift with technology. We’re seeing a lot of companies in our industry advancing their digital agendas, so there’s going to be a real shift.
If you look historically, the industry is primarily insuring tangible assets, there’s going to be even a more significant shift to insuring intangible assets: brands and intellectual property and networks, virtual supply chains, those type of things.
That’s an area where Bermuda could be well positioned to play a pivotal role.
“It’s very encouraging to see that Bermuda has done almost everything that it can to innovate and adapt.” Nicolas Plianthos.
Nicolas Plianthos: There are things out of our control but it’s very encouraging to see that Bermuda has done almost everything that it can to innovate and adapt, and I have no doubt that it will continue.
The financial services and the tech sector are doing fantastically, but there is a whole lot of other industries that are struggling and will struggle for a very long time, and what will that mean for Bermuda’s and the world’s future? How will Bermuda factor in solving basically the world’s problems?
Richards: Climate change is another area where Bermuda’s role has probably never been more globally relevant. In our view, the effects of climate change could create the potential for unprecedented cat losses in the coming years.
Bermuda has a very deep expertise in cat reinsurance and also in the science of natural catastrophe risk management, and that makes it an ideal champion in the efforts to increase insurance coverage in disaster-prone and developing countries that often lack it.
Brad Adderley: I agree with Andre’s point: we don’t know where the staff are going to be but if we start seeing the senior decision-makers coming down to Bermuda for this one-year work permit, being on the Island, then that will encourage them also to put more roots on the island, and will help to ensure that we hire a couple of people.
Bermuda will never again have the likes of big companies like ACE and XL employing hundreds of people in Bermuda, but we can handle 100 companies with three people here. The biggest expense that you have in Bermuda is office space, plus staff. So if you can have people working from home, they don’t need the office space and you’ve got the decision-makers in Bermuda, hopefully, then that works.
It comes down to whether we can get the senior people from the East Coast, inland, move to Bermuda, whether it’s for COVID reasons, safety reasons, family reasons, and good planning, good financial planning and leave it like that.
“Everyone always talks about the cost to get a transaction done, how much of the premium dollar is lost to the food chain.” Brad Adderley.
Plianthos: It’s great offering this one-year work permit but we should be more aggressive. Bermuda is stable, it’s functioning and we need to be encouraging other entities and operations to come and work here. We need to be more aggressive about that, instead of just targeting an individual, we should be looking at companies as well because we’ve done a great job.
Brad Adderley: The first area of innovation and regulation that’s been really important for Bermuda is creating that new wave of more efficient insurance companies doing things electronically and online.
People have come out with this new insurance marketplace licensing category who are hopefully going to make doing business between insurers and reinsurers more efficient and easier, because everyone always talks about the cost to get a transaction done, how much of the premium dollar is lost to the food chain.
Specifically, the new innovative classes can be really important to Bermuda because we want to make sure we attract that business to Bermuda, which we have done so far, and that will also help the next wave.
That collateralised insurer classification, by changing of the laws to address some specific challenges, is very important because it shows we are a market leader in the ILS space. It means we’re really trying to appeal to everyone.
“The industry is looking to find ways to optimise and extend the use of insurance and risk management to build greater resilience.” Adria Richards.
Richards: I would probably defer to some of the other panellists on technology. I’ve commented a bit on the role of the BMA, but one thing I would add, just in terms of potential areas for innovation and how Bermuda can lead, that has more to do with Bermuda’s involvement in the public-private sector collaboration to close the protection gap.
Here the industry is looking to find ways to optimise and extend the use of insurance and risk management to build greater resilience and protection for people and communities, businesses and public institutions. That this is an area that Bermuda is well placed to lead the charge.
Plianthos: Bermuda needs to keep its eyes and ears open on what the competition is doing. If you think about the ILS space, Singapore has extended its grant for the ILS industry. Hong Kong is tabling ILS legislation so we can’t rest on our laurels. Competition is always a big factor in this day and age
“I’m mindful of the potential for a new global minimum tax that may be coming.” Gavin Woods.
Woods: When thinking about innovation it’s not just innovative regimes or new regulations.
I’m thinking of how one fund manager recently found a way to securitise trapped capital as a way of releasing funds to investors. That was an innovative approach to a problem that’s been around for a while and an example of how people can work within the regulations to provide value.
In terms of new regulations, I’m mindful of the potential for a new global minimum tax that may be coming.
I know it’s going to be a hot topic and people are keeping an eye on what happens at the end of the year whenever more information is released .
So, while we have addressed the OECD’s economic substance rules—and Bermuda has done an excellent job on that—you can’t rest on your laurels, as there’s always more coming through the pipeline. We have to continue to be vigilant.
“We’ve got that intellectual capital and it is sitting in Bermuda, which is a huge advantage.” Kathleen Faries.
Faries: About Lloyd’s and its approach on ILS, part of the challenge they had was having the intellectual capital to service that business. That takes time to build up.
I would say that Bermuda still has an advantage in terms of all the companies and the services you need to execute on a good idea and we need to continue to capitalise on that strength.
We’ve got that intellectual capital and it is sitting in Bermuda, which is a huge advantage.
One thing I would add though, through the fintech and insurtech advisory work I’m doing, is that Bermuda is still somewhat closed to the rest of the financial market.
One of the things I’m encouraged about is the Bermuda Stock Exchange (BSX) being bought by the MIAX Exchange Group.
We automatically then have in the BSX a wider infrastructure that we can start to leverage in a variety of ways.
Opportunities in a hard Market
“In the property markets, we’ve experienced heightened cat activity causing large losses and trapped capital.” Adria Richards.
Richards: Pricing in the P&C markets was already facing upward pressure due to capacity constraints and increased demand—even before the emergence of COVID-19. This dynamic was caused by several factors. In the property markets, we’ve experienced heightened cat activity causing large losses and trapped capital. On the casualty side, we’ve experienced significant loss inflation.
The resulting impact on price has only been accelerated by the uncertainty of COVID-19 and this should further drive the demand for reinsurance at a time when retro capacity is also constrained. So you’ve got this combination of factors that’s driving significant rate increases, and we think that this should create opportunities for us for some time.
Malloy: We’ve been playing defence for eight-and-a-half years and I’m naturally an offensive person, so the idea of being able to lean into a market and find opportunities that have profit associated with it is exciting.
Prices are up 40 or 50 off a starting point that is probably 50 percent less than where it was five years earlier, so you can say prices are up, but is it enough? I was very impressed with whoever at Munich called a hard market, I respect that.
I was talking to a broker who said ‘my definition of a hard market is when I can’t get deals done’. And he added it’s not a hard market, yet. Depending on what Mother Nature throws our way over the next 90 days, we could have a very hard market or we might just have a hard market.
Investment income in 2020 is a very different situation from buying a bunch of bonds and having them yield 5 percent. Ninety-day Treasury bills on March 1 were yielding 2 percent and they’re yielding nothing now.
We had $300 million to $400 million in 90-day T bills that were the safest investments in the world—that is returns the shareholders aren’t going to be getting going forward, that we have to find elsewhere.
You’re either going to take more risk on the investment side or you’re going to continue to work on the underwriting side to increase your profitability, so we need that market on the back of the reversion to the mean that’s occurring on the property cat side, the unwinding of 10 years of laziness and sloppiness on the commercial insurance side, and COVID-19. That additional rate is needed for our business.
“Ninety-day Treasury bills on March 1 were yielding 2 percent and they’re yielding nothing now.” Daniel Malloy
“In terms of investor sentiment, there’s still a good appetite for allocation to non-correlated risks.” Ariane West.
West: Noting that I’m on the climate side of things, and so am more of an observer, I would say that one of the things the hard market is evidence of is appropriate discipline in underwriting and that managers are being good stewards of capital.
That’s certainly something that we think a lot about: doing the work to support a view of pricing, as well as being proactive about creating alternative channels for capital with attractive expected returns.
In terms of investor sentiment, there’s still a good appetite for allocation to non-correlated risks that are well priced on a risk-adjusted basis and continued interest in diversified risks.
From our point of view, there is a lot of opportunity out there and it’s just a matter of continuing with that disciplined approach as well as looking for other ways to deploy capital, to allow for that balance to occur in the market.
Faries: I’m trying to be optimistic but I’m sceptical. We’ve seen there has been quite a bit of capital coming in. Reinsurers are still in a very challenging environment, and you then layer on a changing climate. Secondary perils are not so secondary any more, we’ve got a cyber environment that is dynamic and evolving.
It’s great that rates are moving in a better direction for the health of the reinsurance industry, but we still have a way to go to get a return on equity that is sustainable. A lot of it will depend on how much capital flows in and whether the industry can maintain underwriting discipline in what will be a long-term low interest rate environment.
“Secondary perils are not so secondary any more, we’ve got a cyber environment that is dynamic and evolving.” Kathleen Faries.
“Looking ahead to 1/1, that W impact will probably flatten out and we’ll see a significant hardening of the reinsurance rates as well.” Anup Seth.
Seth: Prior to COVID, coming into 1/1 2020 we were experiencing a W hard market. There were significant rate increases on commercial insurance business including E&S business and specialty lines like D&O.
We also saw significant increases on the retro side, but the reinsurance market was caught in the middle and was firming but certainly not hardening as much as the other markets—hence that W shape.
Then COVID-19 hit. The primary carriers do have significant exposure to COVID claims and given the uncertainty around the magnitude of this exposure this has led to a much harder reinsurance market as well in June and July.
Looking ahead to 1/1, that W impact will probably flatten out and we’ll see a significant hardening of the reinsurance rates as well. Looking at underwriting performance over the last three to five years, if you look at Lloyd’s as the bellwether of our industry, the last three years have been at an underwriting loss.
We need significant rate increases to bring the entire market back into underwriting profitability rather than just relying on the investment income to get us through. We need to have that risk-adjusted return now that interest rates are so low, looking at it as a relative measure, a ROE anywhere between 8 percent and 12 percent is a decent return, but we need to have a sustainable model at those sort of levels.
Plianthos: When you have a company that was buying $4 billion of limit for property coverage, it can now only get $2 billion and it has to pay more for that $2 billion, people will definitely be arguing that it’s a hard market.
As a result of that, a lot of our clients are writing new lines of business in their captives and that’s keeping us very busy. If you looked at the BMA registration and statistics, that’s only talking about new companies. I’m pretty certain if you had to ask the BMA to divulge all the applications they get in for new lines of business coming through their captives, you would see a significant increase because of the hardening market.
“A lot of our clients are writing new lines of business in their captives and that’s keeping us very busy.” Nicolas Plianthos.
ILS COMES OF AGE ON BERMUDA
“Investors who are well informed understand the opportunity that ILS brings to this market.” Andre Perez.
Perez: I will start with the negative because I like to end on a positive note. We’ve had a number of years of heavy losses, we had the California wildfires which brought a bit more uncertainty in terms of non-modelled risks being assumed. Now you have COVID-19 and potential seepage within the property cat area—again it wasn’t modelled and probably wasn’t even priced, and it makes investors worried. There’s always uncertainty.
I know a lot of investors will ask ‘what are you doing about climate change in terms of the modelling?’. All of those factors combined, which led to trapped collateral, losses coming from different areas, have made some investors nervous about this sector.
The positive side of it is that investors who are well informed understand the opportunity that ILS brings to this market, and already in January we had some pretty significant rate increases. Certainly, we’re seeing more rate increases in June and July and as that trend continues, there are always going to be opportunistic investors.
Despite all of the negatives, ILS is still very important market. The cat bond sector has probably had a banner year this year and will probably have a banner year next year as well.
“Looking at the year round, I will be interested to see how many new classes there are for reinsurers.” Brad Adderley.
It’s too big to ignore and I’m encouraged about the fact that we’re getting existing ILS funds, raising additional capital, we’re seeing new ILS platforms being formed.
The future is still bright. From Horseshoe’s perspective, we are the busiest we’ve been since Horseshoe was born. That gives you a sense of the market activity.
Adderley: I’m with Andre on this. Normally, you’re busy after Monte Carlo but it’s been crazy through COVID-19. I thought after we all went into lockdown it would be quiet, but I’ve seen none of that. The amount of business that’s come in the summer for cat bonds coming early is huge.
This is along with the startups we had pre COVID which haven’t hit the press yet, and then you add into that all the management teams and people we’re talking to now about raising capital.
Looking at the year round, I will be interested to see how many new classes there are for reinsurers, new ILS funds, who’s raised capital. Even life reinsurers, there’s some unique things going on right now in this space, which people will look at and go wow.
There’s a lot going on and it’s going to be absolutely crazy.
“We’re seeing a lot more enquiries about how to facilitate a third party capital strategy.” Anup Seth.
Seth: If you look at the different solutions that the ILS industry is offering, on the cat bond side we’ve certainly seen an increase in demand and given the increased liquidity that investors like, that side of the business is doing really well.
At the other end of the spectrum, some of the larger ILS funds are transitioning from special purpose insurers to commercial reinsurance companies, for example a class 3a licence.
This enables them to obtain a financial strength rating and compete with the traditional reinsurance companies and benefit from capital leverage.
The other piece to mention is traditional carriers have accelerated their third party capital strategies to leverage their underwriting and distribution infrastructure and earn additional fee income.
We’re seeing a lot more enquiries about how to facilitate a third party capital strategy.
“A key element and advantage of ILS is the ability to be very nimble in terms of how the capital is deployed.” Ariane West.
West: A key element and advantage of ILS is the ability to be very nimble in terms of how the capital is deployed. You have enhanced flexibility to seek out the best value, and to look at new risks and new strategies and have quite a broad playing field and vision in terms of which way you’re going to focus at any given time, given where rates are and how we’re viewing the risk in any market for a given season.
With respect to challenges such as climate change, that is something we devote significant resources to in terms of our analysis and looking at evolving climate trends.
This has been thrown into sharper focus for society at large, particularly in terms of the past five to 10 years, but it’s something our industry has always been highly attuned to. It’s fundamental to our view of risk.
Managing that effectively is key to ensuring that we’re getting the right returns for our investors and seeing the full board when we make underwriting decisions.
“The events of the last few years have forced ILS managers to truly understand the risk they’re taking.” Adria Richards.
Richards: There have indeed been a few consecutive years of trapped and lost capital and then you’ve got COVID-19 and the uncertainty that this brings from a potential exposure perspective. I agree that there are some headwinds for the ILS market that could persist into 2021.
We’re always going to use ILS capital and, despite some of the dislocations in the market, we successfully raised third party capital in support of the recent mid-year renewals.
However, the events of the last few years have forced ILS managers to truly understand the risk they’re taking and partner with companies who have a track record of performance and execution: a flight to quality.
“We’re continuing to be very bullish on the ILS sector generally going forward.” David Brown.
Brown: In terms of ILS: we’ve seen a bit of a slowdown over the last couple of years just with some trapped capital, etc, but we’re continuing to be very bullish on the ILS sector generally going forward.
It’s encouraging to see some recent potential new launches, so longer term you’re going to see some successful standalone ILS players, but you’re also going to see the use of third party capital with the teaming with traditional reinsurers or as part of their organisations and leveraging their underwriting.
Bermuda has such a strong reputation on the asset management side and that’s a key ingredient to the success of ILS as a leader so we just need to continue to leverage that and hopefully with some of the economic substance and those types of things, the ILS industry can stimulate the additional growth on the more traditional fund space.
Perhaps the ILS industry can also play a role in addressing some of these pandemic-type risks going forward.
MARKET FORCES DRIVE CONSOLIDATION
“There is already a lot going on, keeping in mind that there’s a finite number of companies left with which to consolidate.” Gavin Woods.
Woods: The expectation is that there will continue to be a lot of M&A activity—there is already a lot going on, keeping in mind that there’s a finite number of companies left with which to consolidate. What’s driving that is opportunity—in part, companies taking advantage of the existing financial conditions.
Kelly: When we’re having conversations with some of the PE houses that are looking to potentially enter the market in 2021, the question they are asking themselves is whether to start up as a brand new shell or look to acquire something, either a piece of an existing organisation, or an actual company itself to get you straight into the market, if you buy the right business.
When we think about what’s likely to drive M&A in the immediate term, it is that ability to quickly access the market that attracts incoming capital to some of these existing companies.
Brown: We’ve seen a number of transactions, some have been fairly large. A number of the others are more niche or strategic acquisitions so we’re going to continue to see that, we’re seeing a good pipeline of deals in our practice currently so that’s encouraging.
It’s going to be interesting to see whether the hardening rate environment slows some of the activity on the property casualty side, that’s what you would probably expect, but it’s also the sector that’s seeing a lot of activity right now.
“The question they are asking themselves is whether to start up as a brand new shell or look to acquire something.” Sean Kelly.
“It’s going to be interesting to see whether the hardening rate environment slows some of the activity on the property casualty side.” David Brown.
Some of these new startups are going to be driving some of the activity in that they quickly want to gain scale and take advantage of the hardening market. We talked a lot about the property casualty side of business, and we’re seeing a significant amount of activity on the life reinsurance area as well, which is exciting for Bermuda.
Perez: I agree in terms of the newcomers needing to buy companies because there’s no way they’re going to be able to take advantage of the general renewals.
The problem again is COVID-19 throwing a bit of a monkey wrench in the valuation side, so that has slowed down activity a bit. From what I see on the market the newbies, in order for them to gain scale are going to have to make some acquisitions.
Adderley: I agree that size is important to the amount of capital the insurance company has on startups, and that startups are buying platforms in other jurisdictions, but I wonder how much M&A activity will actually be in Bermuda.
First off, existing players have been so busy raising capital taking advantage of this new hard market, they might not be necessarily focusing on external growth—they’ll be doing internal growth. We’ve seen that with people specifically coming out saying ‘I’m raising capital to take advantage of this market’.
“The problem again is COVID-19 throwing a bit of a monkey wrench in the valuation side, so that has slowed down activity a bit.” Andre Perez.
“I’d be curious to see if there’s a lull for a year and a half, because new startups will be crazy just trying to get systems in place.” Brad Adderley.
On the new startups that will come, will they be big enough players to lead the market? Probably not. I don’t know what the new startups will be, but I don’t think they’re going to be at the Convex size. But they themselves have been so busy trying to implement the structures and management teams and trying to get on to lines of business, they won’t have enough time or capacity to think about who else they could buy, and they’ll be the smaller players in the marketplace.
They could buy stuff externally, but internally, in Bermuda, I don’t know how much M&A we’ll see. We might see rights agreements instead: people taking over people’s books of business without buying the company, but taking the rights to that book of business. That might occur more.
I’d be curious to see if there’s a lull for a year and a half, because new startups will be crazy just trying to get systems in place, and everyone else will be trying to take advantage of the hard market. Plus, in Bermuda, how many more entities are there that you can buy?
Seth: A few years ago, the motivation for M&A was the lack of organic growth opportunities so companies were buying other companies and it was more an expense or efficiency play because they couldn’t go out and underwrite and meet those profitability targets, so they bought other companies and drove the efficiencies that way.
Now, if you’ve got some spare capital, you can underwrite and generate good organic growth going forward. What is driving the M&A now is more PE firms searching for yield. With interest rates being so low, they’re looking around saying ‘what is the best risk-adjusted return?’.
The acquirers are different, and the motivation is different as well.
“What is driving the M&A now is more PE firms searching for yield.” Anup Seth.