I think they did a very good job last year; this year hasn’t been so good,
Bermuda Re/insurance: Are finance houses meeting the
but if you look at their total returns over the last five years, they’ve
needs of their reinsurance clients?
done a pretty good job. The problem is convincing the board that now
is the right time to consider it, having had pretty awful returns over the
last year to year-and-a-half. So yes, there is more interest in alternative Russell Busst: I saw that question and phoned up our banking
investments, but people aren’t pulling the trigger just yet. group, and its response was: “Actually, they don’t seem to have many
needs at the moment because they seem to have a lot of money.”
Bermuda Re/insurance: We’ve heard that it’s a challenging
time at the moment for reinsurance companies on both
Robert Quinn: I’m a trustee not a lender, but Wells Fargo as an
sides of the balance sheet. To what extent should reinsurers
institution is generally a lender. But since the trustees are the face of
be relying on their investment income to make up for a fall in
Wells Fargo for a lot of these insurance and reinsurance companies,
underwriting income?
they’re asking me for money, and I don’t have any. I can barely get
to Monte Carlo! But I will say that this is probably the worst time to
try and get an unsecured credit line from anyone. It’s just the worst
Allan Waters: Our first principle is that underwriting comes first.
time to do it, for all the obvious reasons that we’ve been talking about
No matter what asset returns are, we need to expect an underwriting
today. I’m hearing good things about the banks’ services and I’m also
profit on every piece of business that we write, regardless of investment
hearing that it’s awfully quiet in the credit groups these days. Overall,
return. That’s a standard rule we apply.
my clients seem to be pretty happy. Of course, each relationship is a
work in progress.
John Andre: For the Bermuda market in the mid part of 2008,
there has been a combined ratio of about 85—that’s before reflecting
Allan Waters: Banks have done fine by us over the years and we’re
investment income—so probably low to mid-70s on an operating
happy as a user. You have to get to know your banks, and some banks
basis. Again, the variability was significantly higher four years ago.
understand the reinsurance business and our approach to the business
So it’s an issue of managing the trends and managing the variability
better than others. Finding the right fit is important.
of business. And it depends on the business mix. Certainly, IPC’s
Robert Quinn: One last point is that if I am a lending bank and
combined ratio was in the teens through six months of 2008 because
I don’t know much about the reinsurance business, it is going to be
it’s a heavier property writer versus others that have a casualty band.
awfully hard to step in and lend to that industry. Even banks that have
So it’s about managing the cycle and managing how the company’s
insurance credit divisions don’t necessarily have strong relationships
business dictates how it should invest its assets. If anything, I think
in the reinsurance business. It’s a very specialised area, as most of you
investment income should bolster a company’s performance, but it
know. So if anyone is approaching a bank, the key is to remember that
shouldn’t be a crutch per se.
the more you can tell your bank, the better (of course), but sometimes
Russell Busst: If my memory serves me correctly, the period where
that’s just not where that bank performs well.
we were making lots of underwriting losses but overall profits was
Allan Waters: The one banker who understood our business better
when investment returns and fixed income markets were in double
than anyone else in the 1990s switched banks and his new bank did not
digits—12 to 14 percent—and we’ve not been in that environment for
have the appetite. So while we see each other and we’re glad to see each
some time.
other, we haven’t done any business since he changed banks.
Allan Waters: The last time we were in that environment, you
Bermuda Re/insurance: Russell, you talked about the credit
had cash flow underwriting. You had economic inflation, social
crisis and increasing spreads. Could you comment more on the
inflation, broken balance sheets—this was 1984—and you had the
increasing costs of letters of credit and LOC facilities as they
worst components of the perfect storm in the insurance industry, in
come up for renewal over the course of the next few years?
my career at least. Very severe damage was inflicted by that whole
confluence of factors.
Bryon Ehrhart: Thinking about it on an Russell Busst: As an industry observer, my view is that LOC costs
enterprise risk basis, you listen to clients are going to remain high over the next year to two years. The reason
thinking about going after additional yield I say that is because the risk aversion in the investment management
in a softening market and it sounds a lot industry will remain high, and we normally see a credit crunch at the
like: “Would I write higher limits as the end of an economic slowdown, as we start seeing economic activity
market softens?” Because all you’re really tail off, pressures on balance sheets increase, margins fall, and we see
doing is taking more risk. If it doesn’t make
bankruptcies and rating downgrades, etc. And then the banks get into
intuitive sense on the right-hand side of the
trouble because their clients are in trouble. We haven’t seen that this
balance sheet, why would it on the left-
time; we’ve seen the banks get into trouble first and their clients are just
hand side of the balance sheet? So there needs to be good judgement. If
getting into trouble about now. We’re seeing an economic slowdown
you look at this relatively low-rate environment, people are managing
in every part of the world. I think there’s a very good chance we’ll see
portfolios that are relatively short in duration now because they
a secondary credit crisis. If that happens, the banks will be shoring
expect it to change, they expect to have higher rates in future. And
up their balance sheets and they won’t want to use capital on book
while you’re running a global business, interest rates are low globally.
building because they’ll be worried about credit risks, and so they’re
That realisation from an enterprise risk management standpoint and
going to choke their clients in terms of liquidity, and margins will
modelling standpoint helps to crystallise it for a lot of people.
remain high. That’s my take on it, but I’m not a bank.
Bermuda Re/insurance . October 2008 29
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