Insurance-linked securities capacity here to stay: Hiscox CEO & Chairman

by Artemis on July 31, 2013

Both the Chairman, Robert Childs, and CEO, Bronek Masojada, of Bermuda headquartered insurance and reinsurance group Hiscox have said that they see insurance-linked securities (ILS) capacity as a permanent and growing feature of the wider insurance and reinsurance market.

The comments were made as Hiscox reported its second-quarter 2013 results. Hiscox has itself made more concerted moves into ILS and third-party reinsurance capital management in recent months having invested in the Third Point Re catastrophe fund in late 2012, launched and begun deploying capital through a new collateralized reinsurance sidecar Kiskadee Re and creating a new role at reinsurer Hiscox Re of Director of Insurance Linked Securities (ILS).

All these activities point to a broad ILS and third-party capital strategy at Hiscox, with plans to leverage other platforms (such as the Third Point Re deal) as well as create its own facilities for managing third-party capital and deploying that capital within its underwriting businesses.

In its second-quarter results press release, Chairman of Hiscox Robert Childs said in a statement; “Declining investment returns have not only squeezed margins for insurers and reinsurers but also attracted competition from investors such as mutual funds and life insurers who are chasing better yields and are aware of the recent good returns in reinsurance. The Insurance Linked Securities (ILS) market has been developing for a number of years and we believe it has now reached critical mass. Although ILS capacity is here to stay, we don’t believe that it will replace the conventional market but rather complement it, and so we are incorporating these developments in our own strategy.”

Childs went on to comment about the rate impact that capital markets capacity has been having within certain lines of re/insurance business, saying; “Increased competition from the capital markets combined with lower loss levels are putting pressure on rates in reinsurance.”

However that increased competition hasn’t dented profits at Hiscox’s catastrophe reinsurance focused Bermuda arm, Childs said; “When the wind doesn’t blow and the ground doesn’t shake we expect Bermuda to make money and it has done. Gross written premiums were broadly flat at £161.9 million (2012: £159.4 million) despite increased competition from capital markets and general excess capacity.”

According to Childs, Hiscox sees an ongoing relationship with third-party capital, alternative reinsurance structures and ILS. He commented; “Hiscox has a history of leveraging the expertise we have built in reinsurance, from the first side-car at Lloyd’s with Wilbur Ross in 2006, to the Third Point reinsurance partnership in 2012. Between 2008 and 2013 we ceded US$600 million gross written premiums through quota share arrangements. This year we formed Kiskadee Re, a new special purpose vehicle writing collateralised reinsurance. We will continue to study the alternative risk transfer methods that are being developed and use them or underwrite them, depending on price levels.”

Meanwhile, the FT reported on the 29th that CEO of Hiscox Bronek Masojada had said that the influx of capital into the reinsurance space from third-party investors was not a passing fad and in reality was here to stay and would grow as a percentage of the market.

Speaking as the Q2 results were announced, Masjoada said; “Some people say that as interest rates go up, insurance-linked securities will disappear. But they are here to stay. We think it will be between 15% and 30% of the business. At the moment we’re closer to 15%.”

Hiscox continues to cement a position firmly within the ILS space for itself, with its experienced team based in Bermuda and its willingness to work on flexible capital management solutions for itself or as a partner with others. We expect Hiscox to be one of the firms leading innovative initiatives to help bring more capital into the sector as the insurance-linked securities space expands.

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