Bermuda leads the ILS pack
Bermuda continues to lead the way in the insurance-linked securities (ILS) market, according to attendees at September’s Monte Carlo Rendez-Vous.
Brad Adderley, partner in the corporate department of Appleby’s Bermuda office, says that the ILS market in Bermuda looks very healthy, with more issuances and more platforms being built.
“2018 looks very good, particularly in the collateralised space,” Adderley says. “There are more issuances, and more people doing business—it’s gaining traction and entering the mainstream.”
Insurance managers, investment banks, cedants and investors are all looking at ILS platforms and asking whether they should have their own.
“It’s continuing to grow. By the end of this year there will be more platforms and more trades,” he adds.
Adderley also notes that more funds are considering writing business in a more traditional way—and some are exploring the possibility of getting rated to achieve this.
Last year Lumen Re, the collateralised reinsurer of LGT ILS Partners, secured an AM Best rating of A (Excellent). Other funds are believed to be exploring this route.
“Some players have always been in ILS. Now Lumen Re has come over and overlapped, directly competing with cedants if they so choose,” Adderley says.
He suggests that this may signal more ILS players looking to explore rated vehicles, although this can be a lengthy process, with complex corporate governance and regulatory costs to consider.
The missing failures
Despite the buzz around ILS, Adderley notes, many new funds are not successful; in fact the success rate is quite small, partly due to how long it can take to process some of these transactions.
Commenting on London’s passing of regulations that allow the issuance of ILS from that market, Adderley is not concerned about Bermuda losing ILS business, but he does have some concerns that Cayman could lose some European business.
“There’s always competition. Everyone will say competition is good—it helps you to review what we do and make sure we do it right,” says Adderley.
The London ILS market has already completed some deals. Neon Underwriting launched its first ILS vehicle in the UK at the start of 2018: NCM Re completed the first UK ILS transaction, a $72 million collateralised quota share reinsurance transaction with Neon’s Syndicate 2468.
Halfway into 2018, SCOR became the first reinsurer to use the new UK ILS regime to issue a cat bond.
“The majority of cat bonds and ILS platforms are on Bermuda. What is the impact if we or Cayman lose one or two of those deals to London?” Adderley concludes.
According to John Huff, chief executive, Association of Bermuda Insurers and Reinsurers, partnerships between traditional capital and ILS will become the new operating model going forward.
Huff says that many of the discussions at the Rendez-Vous centred around ILS and the traditional market, and that now might be the right time to change how the market deals with the two.
“The way forward will be a blend of traditional reinsurers and those traditional reinsurers using ILS or capital market types of risk and using them as part of their value proposition. We can only be stronger together,” he says.
Huff concedes that there will always be competition of some sort, but he adds that to put it into perspective participants are all trying to achieve the same goal, which is to highlight the sector in the Bermuda market.
“There’s no doubt that the Bermuda market does traditional reinsurance very well, and it does ILS very well, so using reinsurers’ expertise and partner capital makes us a superpower,” he says.
According to Huff, the key to Bermuda’s remaining at its place at the head of the market is diversification, a word that he feels has been over-used in the market. What it really means is making the Bermuda market future-proof, a term he is increasingly using.
“It’s how you make your enterprise, market or business future-proof against obsolescence, and how you survive the challenges you are faced with—you do that by diversification.”
He points out that Bermuda will always be the leader in nat cat coverage, with many of the conversations in Monte Carlo being about that, and that Bermuda players are also diversifying into specialisations.
According to Huff, they are doing this in a “narrow but deep” fashion, so whether it’s in cyber, flood, or mortgage, companies are not dabbling in those areas but rather making a concerted effort to learn the business and then go deep into it.
“That’s a brilliant strategy—it’s good for Bermuda, and it’s good for those individual firms, because they’re going in with eyes wide open,” he concludes.
A coveted partner
ILS capabilities are increasingly becoming a coveted asset as re/insurers aim to access different forms of capital, claims Stephan Ruoff, CEO of Tokio Millennium Re (TMR).
“The ability to access capital in a way other than through your own balance sheet is definitely a key factor for running an insurance or reinsurance company in the future,” Ruoff says.
The ILS market is turning into an attractive tool to transform short tail risks. A growing array of risks are being transferred into the capital markets, including wildfire and mortgage risks and even workers’ compensation business, Ruoff notes, adding that more corporates are exploring this form of risk transfer.
A number of recent M&A transactions have illustrated that ILS expertise and access to the capital markets is an increasingly coveted asset for insurers.
Through its $5.56 billion acquisition of Validus, AIG also acquired an ILS asset manager in the form of AlphaCat. Following the transaction, AIG CEO Brian Duperreault said at the KBW 2018 Insurance Conference that he sees “huge potential for the whole ILS market within our portfolio”.
Meanwhile, AXA has gained ILS capabilities through its takeover of XL Group, and Markel is acquiring Nephila to become the largest manager of ILS funds globally.
The industry is going through a very interesting process, Ruoff notes. “There is a huge blurring between what traditionally was a reinsurance company or an insurance company and what has been an ILS manager,” he says.
“Most of the larger, global groups are trying to acquire capabilities that allow them to cover all aspects of the value chain, including distribution, risk retention, portfolio management and fee generation,” he explains.
“This is an interesting trend to watch,” Ruoff says. “From a macro perspective it is a major driver in M&A activities; this trend is set to continue.”
TMR uses ILS for its own balance sheet management and as a business model that supports ILS markets to access, handle, absorb and manage risk—its Tokio Solution Management unit plays a key role in all this.
“As a reinsurer we also want to be a service provider for our clients,” Ruoff says.