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MONTE CARLO ROUNDTABLE 2015
Insight and Intelligence on (Re)insurance Convergence with the Markets
www.trading-risk.com
Autumn 2015
The alternative market’s success with peak cat begs the question – what next?
In association with
Centre stage
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Where to from here?Dear friend,
The ILS market got the chance to step out of the reinsurance spotlight this year at Monte Carlo, after several years as one of the key talking points during the annual Rendez-Vous.
Instead, the focus shifted to M&A and consolidation, as the industry paused for breath after a year of frantic deal-making.
Ironically, the transition has been prompted by the ILS market’s previous success in hogging centre stage – after a storming few years of growth, lucrative catastrophe margins have eroded and forced change upon traditional reinsurers.
But at the same time, this also puts the onus back on the alternative market to consider what is next on the to-do list.
This was the ultimate theme of much of the thoughtful debate among industry leaders at the Trading Risk Monte Carlo Roundtable 2015.
Some still see plenty of room for further growth in the peak cat market – the initial raison d’être for institutional investors becoming more directly active in reinsurance.
However, others at the table suggested that the significant growth to be had from this model may have run its course. In order to keep up, ILS managers would need to offer a broader range of solutions, some of which might require the traditional infrastructure of rated carriers.
All these trends are clearly already playing
out in the market, and the ILS industry will continue to become a more diverse place as specialist managers plot varying routes to their destination of choice.
But ultimately, the voyage will be dictated by the needs of their ultimate investors, not
just their own business ambitions.
It was noteworthy that the voice of the pension fund investor at the roundtable – AP3’s Dan Bergman – reiterated that what he wants from the reinsurance sector is not just an uncorrelated asset class, but also reasonable risk-adjusted returns.
He questioned whether non-peak perils would tick both these boxes if they were accessing the market
directly, rather than through a rated, leveraged reinsurer.
And so the market continues to converge – with reinsurers keen on tapping into such demand, and ILS funds seeking ways to offer such risk to investors themselves.
Fiona RobertsonEditorTrading Risk
EDITOR: Fiona Robertson [email protected]
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EVENTS MANAGER: Louisa Batts [email protected]
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ART DIRECTOR: Paul Sargent [email protected]
PRODUCTION EDITOR: Peter Williams [email protected]
SUB-EDITOR: Ewan Harwood [email protected]
ROUNDTABLE PARTICIPANTS
Luca AlbertiniCEO and Founding Partner – Leadenhall Capital Partners
Dan BergmanHead of Investment Research & ILS – AP3
Charles CollisDirector, Head of London Office – Conyers
Chi HumGlobal Head of Distribution – GC Securities
Dirk LohmannCEO and Managing Partner – Secquaero
Richard LowtherChief Operating Officer (ILS) – Hiscox Re
Darren RedheadCEO – Kinesis Capital Management
Paul SchultzCEO – Aon Securities
Al SeliusPortfolio Manager – Pine River
Michael StahelPartner and Portfolio Manager – LGT ILS Partners Ltd
Published by: Euromoney Trading Limited, 3rd Floor, 41 Eastcheap, London EC3M 1DT, UK. Tel Main: +44 (0)20 7397 0615 Editorial: +44 (0)20 7397 0618 Subscriptions: +44 (0)20 7397 0619 e-mail: [email protected]. 2014 Euromoney Trading Limited. All rights reserved.
3MONTE CARLO ROUNDTABLE
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“THE ILS INDUSTRY WILL CONTINUE TO
BECOME A MORE DIVERSE PLACE AS SPECIALIST
MANAGERS PLOT VARYING ROUTES TO THEIR DESTINATION
OF CHOICE”
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Chi HumAn additional thought is that, apart from scale, it’s expansion of the platform in terms of what type of risks they’re taking on the investment side. They started with property cat many years ago, and with that experience behind them they’re ready to look at other insurance risks. But also there’s a segment of potential demand for cover that is not being provided by the current (re)insurance market. That becomes an interesting area where there is capacity coming in. It’s not capacity against price and other capacity – it’s coming in where there was no capacity before.
Luca AlbertiniWhat I noticed yesterday, for example, is Zurich announcing that they will reduce their reinsurance buying – and not just Zurich, others are doing it too. So the question is how can you make sure that even as a capital market fund, you’re not on the chopping board? And I guess there are elements of being a solution provider, but also being in more than one place in an insurance tower or across programmes will become important. For us, it’s a balance between what is actually fit for capital markets and what is less fit for capital markets and remaining relevant for these kinds of clients.
Michael StahelThese M&A activities will ultimately be good for ILS managers – especially for independent managers. There are two types of companies merging here. The first is Bermuda-based reinsurers suffering from the excess cat capacity and capital levels currently available in the market that are trying to improve diversification and reach. That will lead to more ILS transactions because if these companies are growing they need to optimise their risk-bearing capital base and will increase their protection buy. There is only one market left for them to buy capacity from and that’s the ILS managers and the capital market.
The other element is the Ace/Chubb type of merger – the large primaries, which we expect to again lead to more opportunities for ILS managers. These companies will need to improve the diversification of their portfolio. They will require less capacity and capital and will buy less and buy it higher up in the tail – and focus on ILS managers for their purchase.
Dirk LohmannI agree in part with Michael, in that consolidation on the insurance side doesn’t eliminate peak risk and even if you look at the acquisitions, Ace-Chubb for example, they’re just going to have more US aggregate. There isn’t much diversification in geographic bolt-on consolidation. They’re going to look for efficiencies but when you look at things like aggregates, I don’t see a reduction in demand. On the reinsurance side I also agree, because if you look at XL Catlin, that’s insurance and reinsurance but they have a
The Monte CarloRoundtable 2015
MONTE CARLO ROUNDTABLE
“THERE’S A SEGMENT OF POTENTIAL DEMAND FOR COVER THAT IS NOT BEING PROVIDED BY THE CURRENT (RE)INSURANCE MARKET”CHI HUM
Fiona Robertson Thank you everybody for coming. I want to kick off with one of the hot topics of this year and of the Monte Carlo event – consolidation and how that might be affecting the ILS sector.
Paul SchultzWe’ve been consistent in our view that our clients in general are going to require a greater range of ILS solutions going forward. An increase in size doesn’t necessarily confer the need for a firm to upgrade its ILS suite, but certainly it can be a contributing factor. Bringing in the expertise necessary to offer solutions to clients’ challenges and then having the capital available to execute on those solutions will be very important aspects of the discussion going forward. Clients have a lot of options, and they are looking for partners to bring solutions and not just capacity.
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high geographic overlap and the peak doesn’t go away. There is going to be a challenge for the ILS market in that the cat demand per se is growing, but at a single-digit rate.
Fiona RobertsonYou’ve touched on another theme that I wanted to talk about, which is whether ILS capital is seeking other ways to expand. Some managers do seem to be looking at diversifying risk, whether in specialty lines or the primary insurance market. What do you think the impact on those lines of business will be?
Luca AlbertiniWe looked at the option of doing a specialty fund and specialty is probably one of the softest markets around at the moment. But at the moment, despite the number of losses in aviation, aviation war and marine, there is no sign of rate hikes or even rate stability to suggest people should be going into it. However, I do believe that as an industry we had an overreliance on modelling. This constant focus on the model is something that needs to be further explained to clients: how recent these things are, how different they are and how underwriting can actually help to supplement the model. Because clearly you cannot have properly modelled specialty – or if you model a specialty line like marine, you have a very distorted view.
Richard LowtherYou make a good point. To me, it’s investor evolution, in that the initial comfort was with highly modelled, very binary transactions. Over time, investor understanding of the asset class grew and ILS funds moved into traditional indemnity-based reinsurance. To get ILS into insurance, you need the right fit of investor base. You need an investor who can tolerate a greater level of illiquidity in their portfolio and valuations based on proprietary inputs. There are investors who can do that but they want to receive a premium for that illiquidity, and we have to help them gain reliance on in-house underwriting expertise and modelling. We’ve just launched Cardinal Re and that’s not in a fund form, it’s a sidecar, but for us it’s an evolution to taking insurance business and transforming it into a capital market product.
Darren RedheadYou can’t just do excess and surplus (E&S) as an ILS collateralised vehicle, you need a transformer – you need a rated entity and the leverage that it gives you. When you read about E&S being collateralised, it’s only the cat risk that’s being transferred to the capital markets. So, coming back to Luca’s point regarding specialty lines by themselves – marine, aviation – I couldn’t agree more. They’re at all-time rating lows and if you write them by themselves they suffer because there’s $350bn of cat limit and everybody is chasing that. Aviation limit is maybe $10bn, marine maybe $15bn-$20bn. So it is always going to suffer from that overcapacity because of the relative sizes.
Paul SchultzThe term ILS perhaps has less relevance in today’s market. Cat bonds were the original opportunity, but today what’s happening in collateralised reinsurance is dwarfing what’s
happening in cat bonds. We are evolving the way capital is coming into independent and affiliated managers and being deployed on behalf of clients. Capital is being utilised in all the forms that people are talking about: rated vehicles, companion vehicles, in fund structures – and all of these are creating solutions for clients.
Dan BergmanOur long-term approach to this market has been to focus on a smaller number of investments that we understand well. In line with this strategy, we initially decided to focus on cat risk and to hire the people necessary for that. Now, if we’re going to broaden this out, the question becomes why? The cat limit is the largest one outstanding by far, so why should we move into one of these smaller areas where it appears that less value is placed on our triple A rating or collateral for that matter? It is not clear that we will be rewarded for extending into some of these markets.
Fiona RobertsonLuca was saying to expand the market scope, you need to move beyond well-modelled perils and take a leap of faith in underwriters. Would you support that kind of approach?
Dan BergmanWe can support unmodelled risks, but in that case we prefer
“AS AN INDUSTRY WE HAD AN OVERRELIANCE ON MODELLING. THIS
CONSTANT FOCUS ON THE MODEL IS SOMETHING THAT NEEDS TO BE
FURTHER EXPLAINED TO CLIENTS”LUCA ALBERTINI
MONTE CARLO ROUNDTABLE
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risks that attach frequently enough to allow for a skilled underwriter to develop sufficient experience to assess the risk. If we find the right manager we can certainly move away from the well-modelled perils. If somebody comes with a volcanic eruption or meteor strike, then it becomes challenging and we would rather stay with the domain of well-modelled risks. So far, our focus has really been on the well modelled risks.
Dirk LohmannTo listen to this it sounds like there is about 7 percent of the world’s premium that is modelled, which is cat risk, and the reinsurance industry doesn’t model anything else. And that’s nonsense. The issue is there’s no standard application that can price every risk out there – you need to have capable people with experience in underwriting and assessing the risk. The challenge is investor education – in getting them comfortable with that. It’s much more comfortable if you say “I’m going to give my money to a manager who has skills and capabilities, but there’s also an external validation from a model.” It’s not just a discretionary thing where there’s more hazard. For investors that’s a very important thing when they come into this asset class, because insurance is a very obscure and hard-to understand-concept for most people.
Charles CollisListening to Dirk, I can say that the model does provide some sort of independent verification and is not relying on somebody else’s underwriter. If you read the disclaimer
of the modelling agencies in the offering circulars, they go on for pages. To try to get an individual actuary to stick his head up above the parapet and say: “I priced this independently, try not to worry about it” may be difficult. I can also see this being a big hurdle for some investors.
Darren RedheadI couldn’t agree with Dirk more. The models are good at giving the investors a level of comfort, but as underwriters, actuaries, managers of funds our job is to critique the models and the output. Someone can write primary E&S business in London and it can be the most condensed primary business you will see; and someone can write real business and the primary will model better than the real direct insurance business. But you wouldn’t touch the primary with a bargepole because as soon as a loss happens, it’s going to be a total loss. People rely on the models too much – they provide a view, but you’d better have your own view of what they’re coming out with.
Al SeliusI agree. As a manager, you have to have your own view of what the risk is. But on the unmodelled perils there’s still a limited amount that can be put into the capital market. I can imagine meeting with some of my clients if there was a loss in cyber, say, and we took an undue amount of cyber risk and saying: “What did you understand about that?” There’s going to have to be a lot of education before it gets to the point where it’s as large as the cat market and you can point to models and to the event. I agree with Dirk, it’s definitely an evolution that we’re getting into these markets, but it’s going to take a lot of time and it’s going to be a limited investor base in the beginning.
Michael StahelI tend to disagree. We do not believe that such risks should be transacted directly with capital market investors and ILS fund managers. Investors can already today access these risks if they want to – they can buy equity in insurance and reinsurance companies. We at LGT believe that ILS should focus on cat risk across different regions and structures. If ILS managers engage in cyber or casualty risk, at some point the client will ask you to evaluate highly illiquid positions and will want their money back. Yet some of the events to which these positions are exposed to will take years or even decades to allow for a proper assessment. Such long-term development can only be absorbed on a balance sheet with a going-concern business focus.
Richard LowtherWe have to remember that the appeal of the asset classes is low-to-no correlation. You can buy equity but then you’ve got all those correlations again. What we’re trying to do is build small, virtual (re)insurance companies that investors can get direct access to without the management risk, without the market risk, and all the implications of investing in a large, publicly traded commercial reinsurance company. There is an appeal to getting diversification – especially if you can have some capital efficiency where you’re not having to collateralise dollar for dollar every limit and you can actually take advantage of a balance sheet tail-risk protection.
6 MONTE CARLO ROUNDTABLE
“WE CAN SUPPORT UNMODELLED RISKS BUT WE PREFER RISKS THAT ATTACH FREQUENTLY ENOUGH TO ALLOW FOR A SKILLED UNDERWRITER TO ASSESS THE RISK”DAN BERGMAN
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Charles CollisBut aren’t you back to horses for courses and diversification? Whether it’s Dan or different investors, Dan may want to put a piece into a risk that’s modelled, but be happy to go with an entity that relies more on insurance underwriting expertise. So he might have a piece in both directions, whereas some investors want the more modelled structure versus something like Kinesis, which is more of an insurance company but which doesn’t have the big diversification. So can’t both move forward?
Al SeliusI don’t have my own meteorite model and I don’t think anyone else does, but that’s been snuck in now to USAA deals, and so theoretically we’re already taking some of these risks. You can argue it’s a low risk anyway, but do we really know that? Maybe we’re in a 500-year period when the earth is not being hit by meteorites and now we’re going to enter a very active phase. The USAA was obviously thinking it might not happen, so let’s put it into a transaction. So these risks are already being put into the ILS market.
Dan BergmanWe come to the insurance market with a long-term objective: we want to replace part of our equity exposure with a de-correlated asset class. But we’re not ready to invest in something de-correlated unless it provides reasonable risk-adjusted returns. Within the property cat market, and in particular within the peak perils, we can probably tick both our boxes – diversification and reasonable risk-adjusted returns. But for a smaller, more specialised insurance market, one has to ask the question why would such a market not be more efficiently accessed by a rated, leveraged reinsurance company? What’s the value of our AAA rating or collateral in a situation like that?
Richard LowtherI agree with that, so my point is that the collateral then has to be efficient. You can’t just collateralise all of these limits, you need to be able to actually have some efficiency to your capital, some modest amount of leverage; much more like a small virtual reinsurance company, to your point. But then you can diversify, otherwise diversification doesn’t make a lot of sense.
Paul SchultzBut that’s already happening. We’re seeing the fund platforms create other vehicles, whether those are rated or independent vehicles. And the reason they do it is because they need to offer solutions other than just cat if they are to remain relevant to their trading partners. What’s going to happen, over time, is that for those firms only in cat, pending some type of event that creates a dislocation in the market, trading forward is going to be very difficult.
Chi HumThe way I think about it, parallel to the capital markets, is [in relation to] capital structures. If you think about how companies finance their balance sheet, this spectrum of risk return that they’re offering goes from very short-term liquidity all the way down to equity – and in between you have debt, subordinated and different risk classes. What you
have now is investors in this space with different risk class and risk appetites and supporting investor interest behind them. But as you go down that spectrum and increase the risk, underwriting and alpha becomes much more important. And that’s where the onus will be on somebody with underwriting skill and not just model skill.
Dirk LohmannWe’ve got to come back to why this market exists. It’s because it’s a surrogate or an alternative capital product. And reinsurance is alternative capital for insurance companies. My personal view is we shouldn’t be totally focused on product – risk, cat – and instead start thinking about this as a form of capital that insurance companies can use to optimise their overall structure. Alternative capital is focused solely on cat because there is a space for it, but we probably are close to maxing out on that. There are lots of other areas where there’s need for capital.
Paul SchultzIf you look at some of the M&A, especially in Bermuda, it enables diversification away from just cat. And even the best cat underwriters still need diversification.
Luca AlbertiniThe one thing to keep in mind is when we diversify, to be careful not to start correlating more with our investors’ book of traditional investments. We do cover pandemic but if there is a big pandemic, lots of stock will lose a lot of
7MONTE CARLO ROUNDTABLE
“WE HAVE TO REMEMBER THAT THE APPEAL OF THE ASSET CLASSES IS LOW-
TO-NO CORRELATION. YOU CAN BUY EQUITY BUT THEN YOU’VE GOT ALL THOSE
CORRELATIONS AGAIN”RICHARD LOWTHER
www.trading-risk.com
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value. Terrorism has correlated in some areas, and some industrial risks may also correlate. So unless I create a product and say this one will correlate more, and sell it separately to the investors trying to do specialty, then having too much specialty in the mainstream fund may create more correlation than investors expect.
Michael StahelWhilst I agree that when you isolate such risks in a reinsurance company, again, if you take Dan’s viewpoint, the insurance-linked allocation is the diversifying element within the strategic asset allocation of a pension fund. To what degree should this allocation be diversified in itself? You don’t want to lose everything because of one single large event, so there has to be some meaningful level of diversification within that allocation. But why would you want to explore illiquid and unmodelled areas that presumably only add diversification? What you really need as a pension fund within the ILS allocation is the right return for the right increment of risk and a solid diversification across regions and structures.
Charles CollisYesterday at the Munich Re session, somebody said investors want leverage. When I hear that, and I hear people talking about writing unmodelled risk and different lines of business, I feel like I’m going in a circle. You can have a fund that sets up its own insurance company so it can write leveraged risk underneath the fund, but when you start
doing it unmodelled, you need underwriters. And except for the fact that, as Kinesis and others do, you can silo the risks so that the investor can cherry-pick which risk he is taking, aren’t you basically just getting back to a reinsurance company?
Darren RedheadA lot of customers would still prefer traditional paper to a trust. Collateralised reinsurance started 20 years ago because you couldn’t buy traditional products and it’s got back to the point now where some customers are saying “I prefer the promise to pay”. I agree with you, we’re going full circle. Leverage has always been there, it just hasn’t always been visible. Whether the investor gets leverage from the prime broker, or whether someone is using a front to get leverage – you just haven’t seen it in flashing lights.
Michael StahelLet’s be fair, what we are missing at this roundtable is the most important player in the market – the primary insurer in the role of the capacity buyer. It is less about what the ILS market wants to sell, it is all about what the primaries want to buy. First of all, the buyer wants to be in the driving seat. He doesn’t want to rely upon brokers, consultants, fund managers or anybody else to take a decision on their behalf. He wants to have all the necessary expertise within his company in order to be able to assess what he wants to buy. And in order to figure out what he wants to buy, he first needs to understand how to optimise the purchase around the new solvency regulations. We believe that going forward, the large primary carriers will either buy collateralised cover or will buy from a reputed rated market.
Darren RedheadI totally agree with you for tail risk – that’s what the customers want, the clients want. They value the trust fund, the cash in the bank, they understand with the assets – it’s better security than promise to pay. But for other risks, we’re evolving as the alternative sector, as Dirk said, and we’ll go into other areas and we’ll look more like reinsurance companies, whether or not we evolve into reinsurance companies. But, as Paul said, we can’t just say we’re only doing the top-end cat.
Richard LowtherThe greatest spread compression has happened in those pure cat plays – peak zone, high rate-on-line, the more commoditised end of the market. If you’re only willing to sell peak zone cat, you have to live with competing on price to get access. But if you’re offering broader solutions, there’s still a relative risk return that you can get. Another knock-on effect of selling only direct collateralised is the risk of having trapped capital. As coverage and terms broaden it gets murkier as to whether a contract is loss-impacted or not. Look at an event like Tianjin for example – it can get messy and we don’t know if those damaged cars are marine or if they are property. If reinsurance buyers have collateral they will want to hold it possibly for years because this is going to be a nightmare to figure out.
Fiona RobertsonOn this issue of coming full circle and whether the market is
8 MONTE CARLO ROUNDTABLE
“WE SHOULDN’T BE TOTALLY FOCUSED ON PRODUCT… [WE SHOULD] THINK ABOUT THIS AS A FORM OF CAPITAL INSURERS CAN USE TO OPTIMISE THEIR OVERALL STRUCTURE”DIRK LOHMANN
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starting to reinvent the reinsurance model – as this happens, will the ILS market’s proposition of changing the cycle ring true?
Paul SchultzThe significant change has happened: capital has come into the industry and it has been utilised by clients through the specialist structures we have developed. At this point it’s difficult to judge the impact of ILS on the cycle, but what we can say is that it is different to where we were 10 years ago, and the opportunities going forward will be different. There’s tremendous value today in a $5bn investment manager whose focus is on cat, but when we’re talking about medium- to long-term growth, it’s going to be more difficult to sustain growth in that model versus one that’s a little broader.
Michael StahelIt sounds as if we’re saying we should do only peak cat. The market is constantly evolving. For instance, what we started to do last year and have built up an allocation for – and it’s still cat – is what we call co-reinsurance; where we team up with the larger reinsurance companies in order to improve the diversification in our portfolio. The large reinsurers sell large chunks of capacity to local primary insurance companies with the aim to move into a specific market and squeeze out the smaller reinsurers. But ultimately, the large carriers don’t want to keep too much of that regional risk. They don’t want to keep a $300mn line on an Australian account, for example, so they need a partner to back them up. So they reach out to us as one of the largest ILS managers to take a $50mn-$100mn line on such an account – in the form of co-reinsurance.
Fiona RobertsonWouldn’t the next step from that sort of arrangement be that those buyers just do an ABR Re-type vehicle with investors directly?
Darren RedheadNo, the buyer wants promise-to-pay paper and Michael is sitting behind the promise-to-pay paper. He’s utilising the leverage they get and then providing them with reinsurance coverage round the back door. Again, as I mentioned earlier, all of these things rely on there being a traditional carrier somewhere in the food chain. We’re helping them evolve their business models and that’s helping them gain market share, which is a great tool for both parties. But you need the leveraged paper in there.
Dirk LohmannThe case that Michael just described kind of runs counterintuitively to the reason why alternative capital exists, because you’ve just inserted a credit risk. The counterparty who bought the paper of the client has no direct access to your capital. If that reinsurer gets into trouble, they have no right to your money. I can see how there’s efficiency and it’s good for a big reinsurer or a player who wants to put out a large amount to have capital behind them, and maybe there is some space for that. But it’s probably fairly limited because the end buyer has to manage his counterparty risk and he’s going to say:
“I’m only going to take that much and even if you’ve got collateral behind you, it’s not my collateral.”
Chi HumI agree with Dirk and Michael. If we shift the focus to the ceding company and the buyer, there is an evolution from the buyer as well, and it’s hitting on the points Dirk said – the counterparty risk. If you’ve got a $2bn programme and you’ve only got two global reinsurers on it, you’ve got a load of counterparty risk. That evolution of the buyer is starting to happen. We’ve seen some of the largest insurance companies in the world saying maybe I shouldn’t buy so much working layer cover. Maybe I should just cover on the most remote events, because I have enough capital on my balance sheet. That’s where we need to be more creative in terms of anticipating and matching that change.
Fiona RobertsonI’d like to move the conversation on to the next renewals season. In the ILS market we’ve been talking about investors reacting to lower spreads and pulling out capital and the subsequent impact on rates. But what are investors expecting in the collateralised reinsurance markets?
Luca AlbertiniI don’t expect investors to pull from the collateralised re market. When the cat bond market yields started recovering, there was some distance between the cat bond
9MONTE CARLO ROUNDTABLE
“THE SIGNIFICANT CHANGE HAS HAPPENED: CAPITAL HAS COME
INTO THE INDUSTRY AND IT HAS BEEN UTILISED BY CLIENTS THROUGH
THE SPECIALIST STRUCTURES WE HAVE DEVELOPED”
PAUL SCHULTZ
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TR Monte RT.indd 9 27/10/2015 10:59
and traditional markets and now there is, in my view, an equilibrium, which is healthy. I always hate to hear that the capital market has to be cheaper. If we provide collateral it should be more expensive, technically. The big debate is whether an increase in the risk-free rate or an increase on the trading values of high-yields will impact the appetite of the market. If the risk-free rate gets to 50 basis points or to 1 percent, then you say okay, should I buy Turkish quake for twice the risk-free rate over risk-free rate? Or maybe I want more risk in the capital structure?
Fiona RobertsonWould that change your mind about investing in ILS Dan, if risk-free rates rise to 1 percent?
Luca AlbertiniWould you still buy Turkish quake at 2 percent?
Dan BergmanI’m not sure I’m buying it at 2 percent! One of the reasons we like insurance-related investments and floating rate instruments is precisely because they are floating rate instruments; cat bonds should deliver the floating rate plus the cat risk premium. So we wouldn’t necessarily require a higher spread on top of interest rates just because
rates themselves keep going up. The floating rate nature of cat bonds and collateral in general will be tested once the interest rates start to rise. We may both see fee hikes in the underlying money market funds and an adverse development of the tax situation. In a rising interest rate environment, we still expect to earn the cat premium on top of the short interest rate. If we don’t, then we’re not happy at all.
Fiona RobertsonBut you have been one of the investors who’s been pulling back from the sector this year. Do you have any expectations of what it will take to get you back in?
Dan BergmanIt’s correct that we have been scaling back on some of our investments, but we are in this with a long-term view to diversify our equity exposure and to get sufficient risk-adjusted returns. The diversification element still makes sense. With some of the recent transactions, we feel the risk-reward is not sufficient, especially when things are so compressed. That’s made us scale back and also to shift some things to non-cat bond investments – to more private-type transactions, where we find better risk-adjusted returns.
Dirk LohmannThe ILS market is fairly disciplined. We saw in the secondary market for bonds that spreads have widened for a very long period of time. That put a little bit more of a backbone into the renewals on 1 June, against some other initial expectations.
People came into that market early in the season hoping for big jumps and then had to come back at the last minute and put stuff together at somewhat higher prices than they were expecting. And then the retro market moved a little bit. It’s not a trend, but it’s a sign that we’ve hit a point where the market says at that level why should I bother, and people just take the money off the table. That discipline will hold at 1 January.
Richard LowtherWe were surprised by how quickly the market changed and I don’t think many people were predicting that the retro market was going to uptick like it did. Maybe these markets aren’t as deep as we think they are, maybe they are very reactive. It can’t be taken for granted that this capital is just going to sit there and be deployed at any price. There is an inflexion point.
Al SeliusYes, we’ve shown discipline in the markets on rates but if high yield gets much cheaper, if we don’t get any returns on our money markets when interest rates start going up, and if money market funds don’t move, then we’re going to actually see spreads widening and this discipline from the ILS people coming in. So there is discipline among the ILS managers and from the market, but we will see it move appropriately. It may have a lag but it will move.
Fiona RobertsonI’d just like to thank you all for coming.
10 MONTE CARLO ROUNDTABLE
“YOU CAN HAVE A FUND THAT SETS UP ITS OWN INSURANCE COMPANY SO IT CAN WRITE LEVERAGED RISK UNDERNEATH THE FUND, BUT WHEN YOU START DOING IT UNMODELLED, YOU NEED UNDERWRITERS”CHARLES COLLIS
www.trading-risk.com
Insight and Intelligence on the London & International Insurance Markets
In April 2015 it had a name and we told
you exactly how it would work…
…Finally on 9 June 2015 the Wall Street Journal gives its launch some airplay
Insider readers knew Richard Brindle was
up to something back in October 2014…
By December our subscribers knew it was big…
www.insuranceinsider.com
Brindle heard it here first ad Oct15.indd 12 14/10/2015 11:04TR Monte RT.indd 10 27/10/2015 10:59
Insight and Intelligence on the London & International Insurance Markets
In April 2015 it had a name and we told
you exactly how it would work…
…Finally on 9 June 2015 the Wall Street Journal gives its launch some airplay
Insider readers knew Richard Brindle was
up to something back in October 2014…
By December our subscribers knew it was big…
www.insuranceinsider.com
Brindle heard it here first ad Oct15.indd 12 14/10/2015 11:04TR Monte RT.indd 11 27/10/2015 10:59
BERMUDA BRITISH VIRGIN ISLANDS CAYMAN ISLANDS DUBAI HONG KONG LONDON MAURITIUS SINGAPORE / conyersdill.com
For further information, please contact:
Charles Collis DIRECTOR [email protected] +1 441 299 4918
Michael Frith DIRECTOR [email protected] +1 441 278 7969
4OPTIMAL LEGAL AND CORPORATE SERVICE SOLUTIONS
4INTERNATIONAL REACH
4EXCELLENCE AND INNOVATION
2015 - 05 - Global - Advert - Conyers - BMU - 216x280 - Trading Risk Sponsorship w-contacts.indd 1 6/2/2015 9:28:14 AMTR Monte RT.indd 12 27/10/2015 10:59
