Bermuda roundtable: (Re)insurers now taking a more coordinated approach to financing and underwriting

A panel of Bermuda leaders and Lloyds Bank executives discussed the fundraising environment – including a contrast between the strong debt issuance environment and a buyer’s market attitude for IPOs – as well as the incoming tax regime in Bermuda during a roundtable held by The Insurer.

During the roundtable, held by this publication in association with Lloyds Bank at the Hamilton Princess in mid-June, Richard Askey, head of insurance at Lloyds Bank, noted that the global macro-economic environment is arguably as uncertain as it has been in a long time, and asked how that was affecting (re)insurers’ decision making.

“How does that affect the buying and the timing of what you're doing in the market?” Askey said. “As a banker, I see people wanting to speak to me a lot sooner this year. They’re positive about what's happening in the market on the underwriting side, but they're keen to talk in detail about their financing options, where we are in terms of bank and investor appetite, general market sentiment, and how this may impact commercial terms and market access.”

He added: “I think part of that is to deal with an expectation of continued premium growth following a strong renewal season at 1.1. Equally there is some concern about the political and economic situation and they are looking to secure market access and have certainty around their banking facilities a little sooner before we get into the second part of the year.”

Allan Decleir, CFO at Fidelis Insurance Group, commented that (re)insurers are a lot better internally coordinated than previously.

“Sitting in the CFO seat, I think historically I would react to geopolitical concerns, economic concerns in one way and then our underwriters were just doing their own thing. One thing that you're seeing now is we are more joined up with our underwriting partners in how we think about our balance sheet and how we think about risk.”

As an example Decleir said he would be wary of “am I doing one thing to hedge out some risk because I am worried about elections and they're writing more political risk at the same time?”

“So I think most organisations, and certainly the ones in this room, are better at thinking about these things in advance nowadays, not just reacting,” he said.

James Ferris, CEO of BMS Risk & Advisory Bermuda, added that everyone is more informed now.

“You say people are joined up, I think it's because everyone in the industry is actually quite informed,” he said. “They have got their own views and they have an understanding of global events and how such events might impact their own business. That is a change compared to 15 or 20 years ago.”

A lot of investor dry powder

Discussing the fundraising environment, Lisa Francis, managing director, head of institutional coverage at Lloyds Bank, commented that it is an interesting point in the cycle.

“There's still an awful lot of dry powder. We've got the bigger players who have raised significant fund allocations. There are obviously a rump of assets that will need to come back to the market,” she said.

Francis continued: “The IPO market does feel still a little bit lacking at this moment in time. I think the problem is valuations still seem to be perhaps a little bit away from the expected valuation metric so there's an awful lot of dry powder out there.

“We still remain optimistic. We do think that at some stage, maybe later this year, it may start to become a little bit more buoyant friendly. But I think good assets are still trading, and I think you will see PE maybe come off their valuations a little bit to try and get the market moving.”

Francis added that she is getting some requests for continuation funds.

“We have a highly focused client approach, but it feels we are getting towards an interesting point in the cycle where your participation choices are ever more prevalent” she said.

Despite the hard market conditions in reinsurance, there has been a notable absence of new start-ups unlike previous cycles.

Ferris at BMS suggested that a number of funds have made their bets in terms of who they want to back, and will just deploy more capital into those.

“And I think sidecars are something that has come along and investors are seeing value in them. The price-to-book value is often not quite there for listed reinsurers, so an investor may say, ‘Why would I invest in a new start-up when my return might be less than less than 100 percent of book value when we IPO or exit, whereas I can deploy into a sidecar and get certainty over exit value.’

“So there is investment coming in, it's just not being deployed into start-ups at present, as it has been in prior cycles.”

Ferris noted that capital light businesses like MGAs are able to raise funds, however.

Strong returns must be proved over long term

Askey at Lloyds Bank noted that underwriting returns have been good in the past year or two but over a longer period are less impressive.

“Private equity players must still be very thoughtful about achieving even a consistent 10 percent return on equity,” he said. “I sense that you need another one or two strong years at least before potentially you will see investment coming into new businesses. But then we might actually have hit the peak in the cycle and they’re maybe thinking, ‘It's too late now, we missed our opportunity.’”

Askey noted that in 2020 and 2021 there were management teams that were looking for private equity support to launch new ventures.

“There were some big industry names mentioned only a couple of years ago looking for private equity backing. From my knowledge of them, one, they didn't raise the private equity, and, two, they were struggling to lock down the executive teams as well,” he said.

Askey said that the sector where private equity does want to play at the moment is distribution.

David Govrin, group president and chief underwriting officer at SiriusPoint, said that “there is a difference between wanting to put capital to work and then wanting to put capital to work in a new venture”.

“I don't think you need a lot of new balance sheet op cos,” he said. “There are start-up businesses in innovative spaces, such as cyber, that may need capital because there's not enough op co support out there. But to just go out and have a start-up for the standard op co to enter the property reinsurance market, there’s really not a good business case to make. Because what is the exit?”

Decleir at Fidelis Insurance Group noted the industry has not been a good steward of capital in the past six or seven years.

“It's not like the early 2000s, when you set up a property and casualty (re)insurer in Bermuda and make 20 percent return,” he said. “It's a different world, you're not going to find money that easily and investors are very valuation sensitive.”

Buyers’ market attitude for IPOs

The IPO market has been slow in the past few years, although there has been some recent indications of thawing in the difficult conditions.

Mark Cloutier, CEO of Aspen, noted that his company paused its move towards going public. He highlighted a change in the past decade.

“I think it's quite a different time from 2014,” he said. “In 2014, there was consistency between what investors were saying about their appetite and their willingness to pay. Right now, there's a real disconnect between what investors are saying about their appetite for the asset, and their willingness to pay for the asset. So you get these real strong signals that, ‘We'd love to have you out here, but we want to steal your company.’”

He continued: “I think the equity capital market investors are aware of this python going through the pig of the backlog of PE-sponsored businesses, and they know that they've been used many times as the liquidity or the exit vehicle. And I think that it's a buyer's market attitude in the investor side of the trade right now.”

Strong fundamentals for debt issuance

Discussing debt issuance, Tom O’Rourke, senior vice president at Lloyds Bank, said it is “a bit at odds” with the situation on the IPO side. He said the fundamentals are very strong.

“Our debt markets across currencies, across the asset classes and the rating spectrum, are on fire. We're in the middle of basically a seven-month-long rally that has brought spreads incredibly tight. There's room to run a little bit further when you factor in so much of the supply has been brought forward from your regular issuers who have big funding plans every year and a number of bespoke issues.”

He added: “And I think that is very relevant for the folks in Bermuda and on the insurance side, because most of these names are not annual issuers in the markets and the real big vintages. There's been a bit of a multi-year absence here.”

O’Rourke said that through most of 2022 and 2023, the market did not want to buy smaller, bespoke deals.

“They wanted to be in Fortune 100 multinational names and liquidity was paramount, and they weren't sure what the central bank was going to ultimately do in terms of breaking the market. But toward the end of 23 found that they weren't going to be able to outperform unless they went off index,” he said.

This led to a number of private credit deals getting done late last year.

O’Rourke added: “Now, a number of you sitting around the table are at different points within your equity conversations, so you do have to potentially offset when you go to debt markets versus what you'd be looking at from the equity side.

“But to the extent there's some headroom there to take advantage of this market, that’s a motivating factor.”

Incoming Bermuda tax regime seen as positive

The discussion also touched upon the Bermuda government enacting a 15 percent corporate income tax regime.

“It's a good thing,” said Kathleen Reardon, CEO of Hiscox Re & ILS. “Bermuda intends to remain the risk capital of the world well into the future. It’s got the infrastructure, access to the business, proximity to the US, and the talent pool. Bermuda does a lot of things well. Bermuda is a very innovative place.

“None of that changes with the new corporate income tax environment. However, Bermuda will have the opportunity to generate income to make it even stronger. That could be around infrastructure, housing, and education. Talent needs accommodation. The school system needs support and the international business segment supports local future talent. So I welcome it.”

Reardon added that Bermuda’s (re)insurers have had good opportunities to share views with trade associations on the island such as ABIR, and that the government has been willing to listen and been very collaborative.

SiriusPoint’s Govrin stated: “I think Bermuda for a lot of reasons has always been an attractive place to do business. The regulatory environment is smart, innovative, business-friendly. There is the talent pool, the innovation. I see it being positive for the reasons Kathleen said, not negative.”

Aspen’s Cloutier agreed, noting: “Today it is about so much more than taxes. It gets the grey list, black list issue off the table, done. And we can move on and take advantage of all that we have here. So I think it's a long-term positive for us.”

Decleir at Fidelis Insurance Group noted that when he arrived in Bermuda in the early 1990s he was told by some that if the tax situation changed then (re)insurers would leave the island the next day.

“We have moved on from that, I think, in a good way,” he said. “I think this is similar to when we adopted Solvency II equivalence a few years ago. Now we're tax-equivalent. I think we've grown up as a jurisdiction.

“All of us here agree that the talent that's here, the infrastructure, the regulatory oversight – everything works for us, I don't think you're going to see much change. On the margins maybe there'd be some change for some people, some lines of business, maybe. But I think that it's a positive in general.”

Ferris at BMS agreed that it is positive. He noted that there are still some uncertainties around issues such as tax credits.

“I think as soon as Bermuda gets those clarified, then we can ride the positives and actually say that Bermuda has a clear path forward, and it will reduce any questions on the net position,” he said.

Ferris added: “At the moment you have taxes that are quite regressive. So I think it is a benefit in the government trying to rebalance the tax burden so that more of the community feels the benefit of having a reinsurance industry in Bermuda.”