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Bermuda Re/insurance Roundtables

pay for fully staffed offices but if you’re building for the five or 10-year picture, then perhaps there will be.

Cooper: These remain very small markets. The entire Latin American market will, in three years’ time, be about the size of the German market, and when you have a lot of capital chasing a small amount of business it creates obvious problems with pricing.

Few: My point would be that the people who are going to get the

best deals in such a market are going to be the ones who are closest to the original buyer, particularly in strong relationship-driven places like Latin America. But it won’t be easy. The effort expended in a dollar of profit in an emerging market is considerably greater than the effort expended for a dollar of profit in the US.

Do you think that regulators and rating agencies are being overly prescriptive in their rulings as regards those investments the industry can pursue, and do you think reinsurers should be allowed to pursue more aggressive asset strategies?

Becker: I haven’t run into a lot of regulatory restraint on asset mix.

You get rating agency constraint, but with the rating agencies it’s not so much the asset category you’re investing in, it’s just how much capital they’re charging you to be in that asset class. It’s a classic cost:benefit analysis. What do you think the incremental return is likely to be versus the amount of extra capital you’re going to have to carry? As regards our regulators, I can’t remember the last time I had a conversation regarding their concern about the mix of the assets on our balance sheet. We remain pretty high quality fixed income for the bulk of our assets.

Rentrup: I completely agree. We at Hannover Re Bermuda have a rather boring investment approach and pursue a purely fixed income strategy. That way we don’t have any discussions with regulators or rating agencies. But can reinsurers go into a more aggressive asset strategy? Yes, of course they can be more risky but it depends on their risk appetite and if they want to allocate their capital more to the investment or reinsurance risk.

Cooper: But you have to be extremely careful. As a business you

have to decide where you’re going to take the risk: on the asset or the liability side of the business. There are some viable business models now, like PAC Re, which are designed to take more asset- side risk, but you have to temper that with a lot less risk on the liability side.

Few: There is, given a sustained period of low investment returns, the notion that the way that the industry is invested through fixed income is not going to deliver the kind of return on equity that investors are used to. This is largely because underwriting rates haven’t responded sufficiently to make up for the lack of investment returns.

If we’re in an extended period of low interest rates, which most people think we probably are, then management teams are naturally considering whether a conservative asset side of the balance sheet is

still appropriate and whether there should be some kind of movement to taking a little more risk to try and improve yield. What I am aware of however is the industry moving a little from very highly-rated debt to fairly highly-rated debt.

Cooper: To get any kind of real improvement on the asset side you

have to invest in a cat bond or similar instrument and that simply doesn’t make any sense.

Driscoll: As an entity PAC Re is pursuing a purely alternative

investment strategy with significantly less liability. It’s a strategy that’s very specific to its circumstances. Validus, on the other hand, has an incredibly vanilla approach. Our investment philosophy is to maintain liquidity and conservatism. We never want a situation where the chief financial officer has to tell an underwriter to put down his or her pen because something has occurred in the global financial markets.

How are the non-cat lines faring? People seem to be getting into speciality and casualty lines more and more. Are these lines living up to expectation?

Becker: We probably write as much of that as anyone here. Bermuda’s non-cat business is a fairly narrow segment of the marketplace. It’s typically excess products, largely Fortune 2000 or Fortune 3000 kind of business. Historically for us, and even today, such lines have remained our most profitable business segments. They’ve shrunk in size as we’ve

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