18 November 2014News

Capital deployment: a challenge and opportunity

According to a panel of CFOs speaking at the PwC/S&P Bermuda Reinsurance 2014 conference, effective capital deployment is a major theme for CFOs in the current market environment.

Joseph Henry, chief financial officer for Axis Capital Holdings, said that a key focus at Axis is how to put capital to work in the business, and how to return capital to shareholders through dividends and share buybacks.

He said that M&A activity and strategic investments, for example through MGAs, are common themes in the industry.

Michael McGuire, CFO for Endurance Specialty, agreed that capital deployment is a dominant theme, with some companies seeing the current soft market as a time to increase retentions.

He said that Endurance is active on the M&A front as it continues to focus on ways to grow as a company.

“Scale and size are going to be quite important to being a relevant global competitor, but we are still two years away from where we want to be in terms of size and scale,” he said.

Jason Porter, director for S&P, said that the industry is well capitalised, with a number of companies having to decide whether to deploy or retain excess capital.

McGuire said that Endurance is agnostic regarding the deployment of capital on the investment side or the underwriting side.

He added that a growing challenge comes from the regulatory environment.

“We have regulators everywhere and they all want their own version of a balance sheet they can regulate and oversee,” he said. “We are seeing the regulatory environment mushrooming from a reporting and compliance point of view.

“We all have our own economic capital models. We are seeing the need to have a bespoke economic capital model that fits the different regulators.”

The panel went on to discuss the importance of reserve adequacy for CFOs.

“One of the easiest ways to prepare for the unexpected is to have risk margins, reserve levels, and layer in level of prudence at every layer,” said McGuire. “You need to create a company and a balance sheet that can withstand those stresses. History will repeat itself and if you don’t learn from the lessons you are doomed to repeat that history.”