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Blend of expertise will keep Bermuda at centre of ILS growth

Bermuda will remain at the forefront of the burgeoning convergence between the reinsurance and asset management industries, because it has an exceptional mix of expertise in both areas.

That is the view of Craig Redcliffe, partner and insurance leader at EY Bermuda, who is confident of further business coming to the Island in the shape of both hedge fund-backed start-up reinsurers and insurance-linked securities (ILS).

Last week, Mr Redcliffe was one of a delegation of seven from EY Bermuda to attend the SIFMA (Securities Industry and Financial Markets Association) ILS Conference in New York, where he spoke on a panel.

He said there was a “positive vibe” at the event, reflecting a strongly growing sector, and Bermuda was very well represented. Other jurisdictions were there too, looking to gain a share of a market in which Bermuda has become the dominant offshore player in recent years. However, Bermuda has strengths that others can't match, he said.

“It's very exciting for Bermuda,” Mr Redcliffe said. “Convergence requires the skill sets of insurance and asset management and Bermuda is very strong in both industries. So Bermuda is very strongly positioned to compete.”

He added that the flexibility of regulators was another advantage for the Island as it competed for such business.

ILS such as catastrophe bonds provide structures that allow investors to be exposed to defined risks in exchange for attractive yields.

Bermuda has been at the centre of strong ILS growth in the past few years, with ILS valued at more than $9.5 billion listed on the Bermuda Stock Exchange.

From his experience at the SIFMA conference, Mr Redcliffe expects to see more of this business coming Bermuda's way, with pension funds being a potentially strong growth driver.

“There is lot of interest from pension funds,” Mr Redcliffe said. “It's such a huge industry that just getting a little more from pension fund managers will increase the flow into ILS quite meaningfully. The take quite a while to do their due diligence on allocation of funds into this area and we are seeing more of that happening.”

He added that the convergence trend was also manifesting itself in the form of collateralised reinsurance and also hedge fund-backed reinsurers, whose investments have a riskier profile as they seek higher returns from their pools of capital, while their underwriting tends to be more conservative.

Pine River is reportedly the latest US hedge fund planning to establish a new reinsurance company on the Island, following the lead of Third Point Re, PaCRe and Hamilton Insurance Group. Mr Redcliffe believes there may be more to follow.

“I have been speaking with a number of asset managers who have expressed an interest in understanding these structures and their benefits for them,” Mr Redcliffe said. “The ones I have spoken to understand that it's a compelling business model with strategic advantages.”

For reinsurers, it's a struggle to generate satisfactory profits for shareholders in a low-yield environment in which investment income is squeezed, especially when reinsurance pricing is under pressure too. Teaming up asset managers with underwriters to improve investment profitability, as has happened with the hedge fund-backed reinsurers, made sense, Mr Redcliffe said.

“There are different degrees of convergence,” he said. “For the most part, it's been asset managers looking to set up a reinsurance company. But is there any reason why an existing reinsurance company can't purchase an asset management company to achieve the same results?”

Traditional reinsurance companies could view ILS as a threat or an opportunity, he added.

“I view it as being an opportunity,” he said. “This industry is here to stay — it's not going anywhere.

“Companies that embrace ILS and use it strategically will have more flexibility.

“My view is that a company managing ILS sits well beside a traditional reinsurance company. A reinsurance company can make best use of capital, by matching each risk to the most efficient capital structure for that risk.”

EY partner Craig Redcliffe

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Published March 10, 2014 at 9:00 am (Updated March 10, 2014 at 9:31 am)

Blend of expertise will keep Bermuda at centre of ILS growth

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