ILS a major change that drove deconstruction of re/insurance balance-sheet: Convergence panel

Speaking at ILS Bermuda’s Convergence 2024 event this week, David King, Founder and Senior Managing Director of Culpeper Capital Partners, stated that insurance-linked-securities (ILS) has been a major change that has helped drive a deconstruction of the traditional insurance and reinsurance balance-sheet.

In fact, King suggests that the biggest trend that has impacted the industry over the last decade has been the deconstruction of the balance sheet.

“I think you’re in a time right now where finally we’ve got returns from both sides of the balance sheet, which we haven’t had for ten to fifteen years,” he said.

King’s comments stem from a panel session that featured notable names across the industry, including Aditya Dutt, President, Aeolus Capital Management, who said: “When I think about the times I’ve gone through in my career, 9/11, and 2005, 2011 and the last couple of years, the thing that that always kind of rings in my head is it is not different this time.

“When I see the companies that have been successful and the managements that have been successful through all of those different time periods, they kind of all do the same things, and the market is always spooked by the same thing.”

Using the aftermath of hurricane Katrina as an example, Dutt explained that the market heard concerns regarding the stability of models and how investors voiced their concerns in regards to how the reinsurance industry modeled severe events like hurricanes.

“What investors in the market need is to have trust and faith in a management and a company, those qualities just never change, and its fairness to your customer, its fairness to your capital provider, its honesty in your dealings. It’s being smart about the really big picture,” he added.

“You have to call the really big trends correctly and the formula of success, we’ve talked about a lot of companies by name today, but I don’t think their formulas are all that different, which is why they’ve been around a hundred years in some cases.

“They do the basic things right and they call the really big stuff right. I would agree with all the specifics people have said about where we are today. But if you’re looking at this market don’t think it’s that different than everything else we’ve seen for the past 30 years.”

Moving forward, the panel also discussed how despite the re/insurance sector experiencing a generational hard market across multiple lines of business throughout the last few years, there has not been a significant class of 2023 and 2024 new startup insurance and reinsurance organisations coming into the market.

Traditionally, following a hard market the industry would see a number of new entities start up with fresh capital, usually coming from the investment community. However, the industry has not really witnessed this over the last couple of years.

Speaking on this subject, King explained that when looking at the market, there is a “massive distraction of life and annuity.”

“If you look over the past five years, the bulk of private capital that’s been raised has gone to life and annuity, not P&C.”

King also went on to discuss reinsurance capital: “If you look at reinsurance capital, its actually grown. I guess you could say a predicate for the market is I need to see a little bit of balance sheet destruction out there. I need to feel like there’s a little bit of a hole in the capital market that drives the need. I don’t think you need that necessarily, but I think the market may be looking for that.”

Adding to King’s point, Kyle LaBarre, Co-Director of P&C Research & Partner, Dowling & Partners, said: “If you look back at some of the prior classes of Bermuda reinsurers, there was a distinct need for that capacity. If you go all the way back to the class of 85/86 when Ace and Excel were formed, it was because there was no capacity to write excess casualty business.

“When you look back at the class of 92 when RenaissanceRe (RenRe) was formed, that was the start of the property cat reinsurance market as we know today, there wasn’t capacity to write that business. If you flash-forward to where we are today, the market has gotten better, pricing has improved, but we haven’t seen that destruction of capital.”

Later on in the session, the topic of managing general agents (MGA) and fronting market dynamics was brought up, as the panelists discussed the notable shift seen in capital towards MGA business, and what’s been driving the benefits, as well as what could cause any further shifts going forwards.

Adding in his thoughts, Raoul Lobo, Vice President, Stone Point Capital said: “If you look at the consolidation in the distribution space, especially in the wholesale side, what you’re going to see is a lot of the large wholesalers like Amlins and Ryan’s are actually in the business of producing specialty risk, albeit in a non balance sheet capacity.

“If you look at Amlins and Ryan’s composition of their revenue, a large quantum of it actually comes from their MGA and binder books, and a portion of that capacity comes from traditional carriers, and a portion of that capacity comes from ILS. The ability to bring distribution closer to the production of the risk is just a natural progression of where the insurance value chain is going to go and it is a source of diversifying their revenue. It’s a source of providing access to an otherwise hard to access, and really bespoke risk.

“If you think about what the wholesalers are providing you access to, it is generally ENS risk that’s a little bit off the run, very attractive risk that you likely can’t find in other parts of the market. I think that is resonating in many different capacities with investors in distribution, but also in those folks that are funding risk in whatever capacity or format that it might be whether it’s ILS or what have you.”