Expense focus means insurance support jobs likely to keep drifting away
Bermuda’s insurance companies are likely to continue trimming their operations here to the underwriting essentials in an economic climate that forces managers to focus on cost cutting.
That is the view of experienced reinsurance executive John Berger, who was speaking yesterday at the Ernst & Young P&C Insurance Outlook event at the Fairmont Hamilton Princess.
Mr Berger, the CEO of hedge fund-backed 2012 start-up Third Point Re, is a great supporter of the Bermuda market, having previously led 2005 start-up Harbor Point Re and the reinsurance operations of Alterra Capital Holdings.
Moderator Pete Cangany, partner and regional insurance sector leader of Ernst & Young, asked the panel what they thought the market would look like in five to seven years’ time.
“I think Bermuda’s a terrific, vibrant underwriting marketplace and I think that stays, “ Mr Berger said.
“But global growth really isn’t there and rates are not going up dramatically. New products and exciting ideas are out there but will take time to grow. So the pie isn’t getting bigger, so what do you do if you’re managing a company? You manage expenses.
“Just like every other company in the world, you have options. We’ve seen companies move their finance functions to Canada, or their modelling functions somewhere else. So I think — and it’s not a very cheery forecast but one that Bermuda is at risk from — that it remains a very vibrant underwriting climate, but just about all the other services go somewhere else.
“That’s a very real challenge for Bermuda over the next couple of years.”
Fellow panellist Brian O’Hara, the former chairman and CEO of XL Group, said the quality of the Island’s financial regulator, the Bermuda Monetary Authority (BMA), stood the market in good stead.
“A lot of other jurisdictions are jealous of Bermuda and like to attack it,” Mr O’Hara said. “After the crisis there was a full frontal assault on the Island and our regulatory regime, and Solvency II was part of that, but the BMA has responded tremendously well to the point that we’ve turned it into an advantage
vis a vis the rest of the world, in terms of regulation.
“I think the balance sheets will remain here, because capital gets treated here better than anywhere else. I hope the underwriting talent stays here and that gives rise to opportunities that require large amounts of capacity, such as cyber risk.”
Endurance Specialty Holdings CEO David Cash expected to see Bermuda companies continuing to expand their global footprint in the coming years.
“I’d say about 75 percent of Bermuda companies will explore international diversification,” Mr Cash said. “Over time these companies will face the challenge of becoming international and over more time they’ll become global companies. That puts a strain on infrastructure and a strain on the culture of organisations and my sense is that most Bermuda companies will see that as their future. That doesn’t change Bermuda much, but it does change the way its companies are perceived internationally and by investors.”
Bermuda has repeatedly benefited from ‘waves’ of new companies setting up on the Island in the wake of major events, bringing capital and jobs, most recently in 2005 after Hurricane Katrina. But with most Bermuda reinsurers trading below book value these days, there is little incentive for investors to establish new companies, Mr Berger said.
“I don’t think we’ll see that again,” Mr Berger said. “If you look at the Class of 2005, Ed Noonan at Validus has done the best, but he’s still below book value.
“So I think the private-equity firms are pretty shy about supporting new companies. I think the development of the sidecar and alternative ‘cat’ capacity really takes the top off the opportunities from the big capital that flows in after a big catastrophe. The dynamics are so different now that I’d be really surprised if we ever saw big capital coming in the form of new companies again.”
The panellists also gave their views on superstorm Sandy, which caused widespread damage and flooding, especially in the northeast of the US. Claims are still developing and both Mr Cash and Mr Berger estimated the industry loss would be in the range of $20 billion to $25 billion.
Mr Cash said that catastrophes involving water damage tended to be the hardest for insurers to deal with.
“It does seem to me that more than 50 percent is water-driven, it doesn’t feel like a huge wind event, and it’s a commercial lines event more than a personal lines event,” Mr Cash said of Sandy.
“Having said it’s a $20 billion to $25 billion event, today I haven’t seen claims notices that would suggest we’re up to that number yet. That tells me we’ve a way to go.”
The panellists also touched on the subject of seeking opportunities in emerging markets. Mr O’Hara raised a chuckle from the 200-strong audience when he spoke about XL’s experience in this area.
“A few years ago, we went into Latin America and Asia, because we knew that those were the markets of the future — and always will be,” Mr O’Hara quipped. “We haven’t really seen the returns. They’re just a totally different environment from an underwriting standpoint compared to the developed world.”
Mr Berger offered similar sentiments about China, saying: “Everybody wants to be in China but nobody’s making any money there. If you want to be there, it’s a long-term investment.”
The Third Point Re boss also warned of the dangers of diversification, suggesting that the result could sometimes be “worse-ification”.
The challenge of generating investment returns in a low interest-rate environment was also a topic of discussion. Mr Cash said Endurance had around 90 percent of its portfolio in high-grade fixed-income and some ten percent in alternatives, such as equities and commodities.
“The high-grade fixed income market feels like it’s in a bubble,” Mr Cash said. “Interest rates are very low, which means the assets are really highly valued now. It doesn’t feel entirely sustainable and no one will tell you when the music will stop.”
Mr Berger argued the case for Third Point Re’s business model, which involved taking the greatest risks on the investment side — with assets managed by Daniel Loeb’s Third Point hedge fund — rather than the underwriting side. He pointed out the risks for the conventional model.
“If a conventional company says it only has ten percent of its investments in alternatives, then it doesn’t sound much, but if you’re levered two, three or four to one, that can be 20, 30 or 40 percent of your equity,” Mr Berger said.
“If you get a situation like 2008 when those alternatives nosedive and you lose ten or 15 percent of your equity, then you get slammed by investors asking ‘what else do you have?’ So the traditional company is really in a tough box.
“Our business model is totally different and has an very aggressive investment strategy.”