New platform, old hand
It’s nearly a year since Hiscox merged its reinsurance operations in Bermuda, London and Paris, appointing Jeremy Pinchin as CEO for Hiscox Re. Pinchin is delighted with how smoothly the process has gone, and puts the success of the merger down to the solid logic behind the decision.
“It made sense for two reasons: one, because the businesses in Bermuda, London and Paris were already very close, they came out of the same heritage—people who had worked previously in London were now in Bermuda, we’ve kept common systems such as modelling—and we have 80 percent common clients. As a result it was a logical step to come together.
“It was logical not just from a practical point of view but, because of the changing dynamics of the market, we needed an executive group that was purely focused on the approach for Hiscox reinsurance rather than looking at reinsurance in two different operations which had other businesses to look at as well.”
Another reason the merger has gone so well from an external view, Pinchin adds, is that from a broker and client point of view the business has operated in a joined up manner in the market long before January 1, 2014. The company has also kept its bases in Bermuda, London and Paris rather than centralising in one location. It affirmed its commitment to Bermuda with the recent foundation of Kiskadee Re, which offers capacity through a Bermuda-based sidecar arrangement. Its current Kiskadee Funds will form the base for Hiscox’s new ILS platform.
Through Kiskadee Re, Hiscox has harnessed the alternative capital flooding into the market, with the new venture aiming to source new business both for Hiscox Re and for capital markets investors hungry for new risks. The new venture complements its traditional reinsurance business and helps the reinsurer be more relevant in providing solutions to its clients.
Experience in new capital
Hiscox is no stranger to the world of alternative capital, having started out as a managing agency in the Lloyd’s market and having managed third part capital throughout its history. The company set up a very material sidecar for a very well-known global investor in 2006, which it subsequently rolled into Syndicate 6104, Hiscox’s special purpose reinsurance syndicate, which still continues, with Hiscox, in addition, operating with numerous quota share partners.
“We have always managed very large amounts of third party capital. What we are now operating in Kiskadee Re adds to that portfolio, bringing in new investors who want to operate through funds,” Pinchin says.
“We launched the Kiskadee Re fund as soon as we launched Hiscox Re and at a pretty difficult time in the marketplace when many of the hedge fund investors were looking to reduce or stay where they were in relation to their investments, but we started a vehicle, we’ve got some traction, and we have invested in the team.
“Michael Jedraszak, our former head of international in London, is director of ILS and Richard Lowther, who was the COO who started Alpha Cat, has come in as our COO to manage the operation.”
"We've also made a big push at having a large product suite, some of them twists on original products rather than completely new products."
Pinchin adds that a number of investors are considering some potentially significant investments into the comingled Kiskadee funds, and Hiscox Re is also discussing the establishment of individual funds to meet the needs of other investors.
He attributes Hiscox’s success in this field to its brand and its strong client and broker relationships which give it excellent access to business, which many of the smaller funds found particularly difficult in the latter part of this year. Pinchin believes these attributes together with quality modelling and underwriting will serve investors well.
“We are already one of the largest third party capital providers, given the amount of support we’ve got through names and quota shares already, and with the current rating environment we are focusing on establishing our credibility and our vehicles rather than amassing scale, because there isn’t enough quality business to put in it. So we need to be cautious about balancing growth and not rush to too much critical mass when the returns are low and the risks high,” Pinchin says.
“At the moment we have made it clear that we will write less business if rates continue to decline because we feel that’s the prudent thing to do in the current marketplace—albeit that in the current benign circumstances those that continue to write more will look good. This is a catastrophe business and the nature of catastrophe is you can’t predict when and what any loss will be.”
Hiscox has always made it clear it will expand and contract its capacity in the volatile insurance and reinsurance lines as the rating environment changes, based on a belief that underwriting discipline is the way to secure longevity.
“Underwriting discipline is being tested by pricing pressure and by extensions of terms and conditions, longer underwriting policy periods or extended wordings, all of which it is important to take care to make sure they are fully understood and priced into our products.”
Pinchin says that Hiscox Re’s approach is also characterised by extensive travel to meet with broking colleagues and enter into dialogue about and with core clients who, he hopes, “like having Hiscox on the slip because it has a sufficient line size and a reputation for service to its clients”.
“We’ve also made a big push at having a large product suite, some of them twists on original products rather than completely new products, but all proving to customers we can add value by giving them new solutions.
“It shows brokers it’s important to talk to Hiscox because we have new ideas and we’re busily selling those in this market. We are also going to customers and using those new products as a discussion tool to help them assess how we can help them solve their business issues, and what additional coverages we can give them,” Pinchin says.
“Because we keep very good quality underwriters in our team, we are able to innovate and provide client service.”
The strength of Hiscox’s staff is a defining factor and the company prides itself on identifying and nurturing talent, with the vast majority of its staff remaining loyal to the company and rising through its ranks. A recent example is the appointment of Michael Krefta as Hiscox Re’s CUO.
“Michael Krefta has grown up through the team, knows the team well, and although young has huge experience already in underwriting terms and in client and broker relationships. It has been a good logical step in bringing forward the future of the business,” says Pinchin.
“Quality people can do very well. We very rarely bring people in from outside but are prepared to if appropriate.”
Pressure from all sides
Asked for his view of the coming months, Pinchin expects continued pricing pressure in the absence of any major catastrophe events, although he says quite a lot could happen, given the profitability of the industry to date this year.
He noted however a lot of competitors have suffered from attritional losses. “Clearly nobody has been impacted by a major catastrophe event.”
Barring any massive loss or series of losses in the next few months, he expects to see continued pressure on rates and pressure on terms and conditions, so his team will strive to maintain underwriting discipline and to ensure that Hiscox Re features strongly on client lists.
“We’ve clearly managed to succeed in that, but we are not prepared to write business at any price and not prepared to accept business with widened terms and conditions that we don’t price in,” he says. He views the pursuit of, for example, cyber business without an adequate analysis and understanding of the risks as an accident waiting to happen. It may not happen in the short term, but that is no reason to abandon underwriting discipline.
For Hiscox Re, it will always remain a priority to get the pricing right and to guard the company’s brand profile. “We continue to be very proactive in working with our clients, our brokers, on new products and at the same time opening up opportunities to other investors to get the benefit of the underwriting capability we have in the broader ILS market. But caution is going to be the watchword in this marketplace.”