September 2014 Bermuda:Re/insurance+ILS 3


Editor’s note Reaching for the levers


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Bermuda:Re/insurance+ILS—ISSN 2056-4627 Cover image: © Tokio Millennium Re


aced with a tough and deepening cycle—characterised by industry overcapitalisation and a rush of convergence capacity—reinsurers are exploring a variety of levers of growth that look set to test the mettle and innovation of industry players. A variety of strategies are being considered by Bermuda players, all with the potential to pep up returns, but few are without their potential pitfalls.


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First among these options is a convergence play, with all but one of the Bermuda majors actively engaged within the space. Companies will however need to grapple with the competing appetites of their traditional reinsurance and convergence divisions and explore the optimum means to maximise the returns of both segments.


Many believe that they have found the right formula to do so, but the variety of approaches and the prevalence of capital right across the reinsurance industry, suggest that some will be found to be without their trunks on when the tide goes out.


In the meantime, all reinsurers are actively engaging the market and looking to establish themselves as convergence partners of choice among the growing number of cedants considering that segment of the reinsurance market.


Others are considering the potential of M&A as a means to achieve scale and possible synergies, but such moves are not without their challenges. Endurance’s failed bid for Aspen is a case in point and recent years have been punctuated by other failed transactions. Nevertheless, the opportunities presented by M&A are significant and with industry capital at all-time highs and the drivers of M&A particularly pressing, the temptation to pursue deals will be significant. Expect others to consider the merits, particularly if mutually agreeable synergies can be found.


Innovative forms are also being pursued at present, from ILS and transformer platforms such as Tokio Millennium Re’s Tokio Tensai platform in the convergence space, through to more investment-focused reinsurance strategies such as that being pursued by Third Point Re and more recently, Watford Re. Fortunately, Bermuda is well-positioned to push the envelope, with an enviable speed to market, pool of talent and responsive stock exchange, that together suggest the Island can continue to remain at the cutting edge of developments in reinsurance. Tough conditions appear likely to be the driver of still further innovative permutations.


Finally, players are also looking more actively at diversification as a means to complement key lines of business. Many are seeking to ramp up their activity in the insurance space, while others are developing their specialty lines business in an effort to balance pressure facing property catastrophe underwriters.


Diversification should help to lower volatility and please the rating agencies, but there are pitfalls associated with entering new lines of business too quickly, particularly in the face of pressure from the cycle. Development will inevitably need to be measured and considered, but conditions are unlikely to forgive those that delay.


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