From the beaches…

We recently attended the Bermuda Captive Conference at the beautiful Southampton Princess (tough, but needs must…!), which was notable for a number of factors- a record attendance for its 10th year; the breadth of representation from both Bermuda and overseas; and the overall optimism that the Island’s (re)insurers will continue to adapt and prosper in the face of the secular trends besetting the industry.

Bermuda is fortunate that, in the Bermuda Monetary Authority (BMA), it has a regulator which managed to achieve recognition as “equivalent” from both the NAIC and the EU’s regulatory authorities. This enables locally-incorporated (re)insurers greater freedom and flexibility in how they conduct business; and should demonstrate to the global financial markets that Bermuda has robust and respected regulatory framework.

Similarly, the Island’s government, in the form of the Premier, who addressed the Conference, made it very clear that it supports the (re)insurance and captive industries, recognizing the value to the local economy and workforce of the continued presence of financially-strong employers in whose interests it is to develop talent and intellectual capital.

That said, there are clear signs of stress in some areas of the “CAT” market, because renewal pricing continues its seemingly inexorable decline; and it remains to be seen whether and how underwriting discipline will be maintained, when revenue streams are being impacted to an extent that may begin to affect franchises and distort cost/income ratios.

What was also interesting was the increasing prevalence of reinsurance vehicles backed by hedge funds, where there is risk aversion on the liability side (allegedly CAT risk is avoided, and “boring” business preferred), but an expectation of returning 15%+ on the funds generated from premia and reserves: the mirror image of a traditional “CAT” (re)insurer. What happens if the investment algorithms do not work, is somewhat unclear. One wonders how patient the investors and capital providers will be. One also wonders what will happen if (re)insurers and captives start giving their reserves to the hedge funds to invest in the hope of higher returns, which subsequently do not materialize; or, worse, whose value is eroded by volatility or losses.

Of course, Warren Buffett has been following a float-investment based model for many years very successfully, as well as being willing to write “CAT” contracts in size; but there is, after all, only one Berkshire Hathaway, with its scale and immense financial strength.

At Awbury, we shall continue to build our E-CAT (Economic Catastrophe Insurance) franchise, indifferent to the vagaries of the NatCAT market, but always ready to adapt as markets and opportunities change, as we expect our peers on Bermuda will also.

-The Awbury Team


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