Mining new markets
Two topics of conversation dominate the reinsurance sector today—mergers & acquisitions (M&A) and the implications of these deals, and alternative capital.
Hiscox is to the fore in both these debates. First, in the view of many analysts, it is an acquisition target, being one of only four publicly quoted Lloyd’s insurers left in play following a spate of mergers.
Second, as a backer of alternative capital into the reinsurance sector both through its partnership with Third Point and in its own suite of insurance-linked securities (ILS) and other alternative risk transfer tools.
“With a limited number of quoted Lloyd’s insurers left, we believe that all listed companies are likely takeover targets,” Paris Hadjiantonis, an analyst at Keefe, Bruyette & Woods, said in a note to clients in September.
But Jeremy Pinchin, the chief executive officer of Hiscox Re, dismisses such market chatter. He says Hiscox is well positioned to rebuff any unwelcome advances since he believes much of the current market dynamic is being driven by companies which are overly reliant on reinsurance.
“We’re confident that our well diversified business, which makes us less dependent on one particular area—property-catastrophe reinsurance for example—positions us well for the future,” he says.
Pinchin does have plenty to say, however, on the subject of alternative capital and ILS in particular.
Why shouldn’t he? After all Hiscox has been involved in sourcing capital from different places from as far back as the turn of the last century—its Syndicate 33 can trace its origins in the Lloyd’s market to 1901.
Today, Hiscox Syndicate 33 is one of the largest composite syndicates at Lloyd’s, underwriting a mixture of reinsurance, property and energy business, as well as a range of specialty lines, and has outperformed the Lloyd’s market every year since 2001 in underwriting losses.
For the 2013 underwriting year, for example, the average reinsurance loss ratio among Lloyd’s syndicates was 25.4 percent; by contrast, Hiscox’s was just over 9.3 percent. It carries an AM Best rating of A (Excellent).
Hiscox owns approximately 72.5 percent of the syndicate, with the remainder owned by what today might be considered somewhat of an anachronism—the third-party Lloyd’s Names, of which Pinchin says: “They have been very loyal supporters to us and have been willing to trade our capacity at significant levels.”
It is Hiscox’s move into the ILS sphere that has excited the market.
Kiskadee Re, the special purpose vehicle formed in 2013 to write collateralised reinsurance, is booming. It seeks to provide clients with broader solutions and complementary products, while at the same time enabling Hiscox to deploy extra capacity on risks and providing another stable and attractive source of fee income.
Key to the success of the operation has been the willingness of investors to partner in Kiskadee. So why has Hiscox been able to attract capital to its ILS funds when others have struggled and even closed?
It is clear that the BMA understands the importance to the commercial insurance market in Bermuda of the jurisdiction achieving equivalence.
Pinchin explains: “In the current market, where access to risk is essential, our Kiskadee ILS funds have a significant advantage over many of our legacy competitors as all of Kiskadee’s business is fronted by the highly rated paper of Hiscox Re which, combined with our global underwriting platform, gives ILS investors much broader access to the market than many standalone funds.”
It’s a relationship that is beneficial to both parties. “Partnering with stable ILS investors is also beneficial to Hiscox Re as it enables us to bring broader and bigger solutions to the reinsurance market,” he adds.
It was in mid 2012 that Pinchin says he “saw the implications of third party capital into the market” and decided that he had to do something to compete. That “something” was Kiskadee and as of July 1 the Kiskadee family of insurance-linked funds has attracted more than $540 million in capital, up from $400 million anticipated at January 1, 2015, with gross written premiums of $87 million.
The zeal with which Pinchin attacked the ILS space was replicated with the market launch in September of Cardinal—a Bermuda-based special purpose insurer—“designed to transform collateralised insurance and reinsurance risk into a security more suited for capital market investors” and taking Kiskadee Investment Managers’ assets under management to more than $600 million.
“Cardinal Re, with its nimble and flexible segregated cell structure, can respond quickly and is an effective way for completing transactional deals where speed to market is critical,” says Pinchin.
“It offers additional opportunities for investors and cedants alike to benefit from our growing Kiskadee family of insurance-linked products, and reflects the growing confidence from investors to take both insurance and reinsurance risks.”
Cardinal Re, wholly owned by Hiscox and managed by Kiskadee Investment Managers is, however, far from the end of Pinchin’s ambitions. “We will continue to expand Kiskadee and we will be looking at other investment vehicles for investors,” he says, but exactly what kind of investors he is chasing he refuses to disclose, save for saying that they are “not in the hedge fund space”.
Kiskadee will grow and other ILS products will be launched to market, in response to investors’ growing appetite as they become more comfortable with taking both insurance and reinsurance risks.
Under Pinchin’s leadership, gross written premiums for Hiscox Re in 2015 have increased by 6 percent, the firm disclosed in this year’s interim report. In common with other reinsurers, the lack of any major catastrophes benefited the bottom line.
The development of innovative new products has set them apart from the industry. Popular products have included risk aggregate protection, second event catastrophe aggregate trigger covers, quarterly aggregate protection and cyber aggregate excess of loss.
Hiscox Re has also broadened its focus by continuing to invest in specialty, healthcare and casualty reinsurance. These entities combined exceeded $60 million premium income in 2014 and Pinchin expects this growth to continue.
The persistent headache for reinsurers for some time has been cat pricing. Rates have fallen here for the third consecutive year, but Hiscox Re is in a better position than most to cope with the pressure on pricing.
“The great advantage that Hiscox Re has over its competitors is that the Hiscox Group is not over-reliant on this piece of the pie. This means that our reinsurance team can remain disciplined, reducing volume if necessary, secure in the knowledge that as a group we have many opportunities elsewhere,” Pinchin says.
“It has already reallocated catastrophe aggregate from reinsurance to our small-ticket property insurance team where pricing is now more attractive. It also means that cedants see Hiscox as a secure partner that will pay claims in adverse circumstances.”
The reinsurance industry has had three years without any material claims, more than six years since a major Gulf of Mexico windstorm, and almost 10 years without a major Florida hurricane. This will inevitably change and when it does, Hiscox Re has a full team of talented people and diverse sources of capital to expand as the opportunity presents itself.
It can be seen as testament to the unique set of skills expertise available on the Island that Hiscox selected Nick Pascall as head of casualty reinsurance for the merged Bermuda and London market casualty team single division.
Operating under the Hiscox Re brand, Pascall will be based in London, supported by senior casualty treaty underwriter Ciaran Mulcahy. Sharmini Samuels, who has been promoted to vice president, will continue to underwrite the account out of Bermuda.
With business written out of both London, through Hiscox’s Syndicate 33, and Bermuda through Syndicate 3624, the division controls a combined portfolio of $50 million gross written premiums, sending a clear signal that casualty is set to be a long-term commitment business class.
Bermuda will also benefit from increased profits from Hiscox’s healthcare division. Created several years ago, it has rapidly developed a growing book of business and Hiscox intends repeating this success in casualty and specialty reinsurance, where it recently invested in new teams.
“We are still growing in Bermuda. I have strong belief in our operation and I still feel that there is growth on the reinsurance side,” Pinchin says.
He has been very complimentary of the Bermuda Monetary Authority’s (BMA) move to seek equivalence with Solvency II.
He says: “The jurisdiction has managed to balance the implementation of high standards of supervision and regulation, while ensuring that the standards remain appropriate to the market to which they apply.
“This has been no easy task with increased scrutiny being placed on non-EU jurisdictions. It is clear that the BMA understands the importance to the commercial insurance market in Bermuda of the jurisdiction achieving equivalence. It is making every effort to preserve the market’s ability to continue to conduct business within the EU.”
This is important for the wider Hiscox group.
“We have always had a balance between retail and big ticket and we have been building a retail brand in the UK and Europe. We want to take that to the US where we see huge growth opportunities,” Pinchin explains. “We don’t see any lack of opportunity anywhere in our businesses.”