www.theinsurer.com Issue Five: 29 September

WRAP A month of dedicated reinsurance analysis and insight from The Insurer... Reinsurers make case for casualty hardening at 1.1 he absence of the annual Monte Covid-19 fallout – including the known TCarlo Rendez-Vous and the platform The drivers... start-ups on the way – is not at a level to it presents has not prevented reinsurers offset upwards pricing momentum. from asserting their view that c Underlying rate increases welcome Speaking to The ReInsurer earlier this meaningful improvement in pricing and but not enough, say reinsurers month, Scor Global P&C deputy CEO terms and conditions is warranted at the c Push for further reduction in cede Laurent Rousseau said the negative upcoming 1 January renewal. commissions impact the low interest rate environment Executives have been lining up to c Concern over 2014-2018 accident has had on long-tail insurance classes go on the record about the imperative years may have been underestimated by some for hardening beyond the strong rate c Social inflation has not abated during in the sector. improvement on the underlying business Covid-19 “The reinvestment rate on the asset that is flowing through quota shares. c Low interest rates equivalent to side of an insurance company’s balance Topmost in the arguments they are catastrophe for long-tail lines sheet has decreased meaningfully. That using are the twin forces of social c Reinsurers increasingly selective over means that the adequacy of long-tail inflation impacting more recent accident cedants classes is further away. Rates will have to years and the “catastrophe” for casualty c Some brokers to push back against increase much more to compensate for underwriters of record low interest rates. cede pressure from reinsurers lower investment income,” he suggested. And they are also suggesting that c Demand surges for ADC/LPT solutions The relationship between the assets the inflow of capital seen so far in the and liabilities side Continued on page 6 Chaucer latest Lloyd’s carrier poised to launch Bermudian reinsurer hina Re-owned insurer Chaucer has applied to the Bermuda risks and are required to maintain minimum capital and CMonetary Authority (BMA) to launch a Class 4 reinsurer on surplus of $100mn. the island, The ReInsurer can reveal. The addition of a Bermuda platform would add to Chaucer’s The London-headquartered carrier has made the operations in Dublin, Copenhagen, Singapore, Dubai and application through its Ireland subsidiary Chaucer Insurance Miami. Company DAC and is awaiting regulatory approval for the At Lloyd’s Chaucer operates through syndicates 1084 and vehicle, which is to be named ‘Chaucer in Bermuda’. 1176. Syndicate 1084 is the 11th largest syndicate at Lloyd’s and Chaucer will use the vehicle to principally target US writes specialty aviation, casualty, energy, marine, political catastrophe business, this publication understands. and property insurance and treaty reinsurance worldwide. Class 4 (re)insurers are vehicles underwriting direct excess Syndicate 1176 is Chaucer’s nuclear focused syndicate. liability insurance and/or property catastrophe reinsurance In 2019, Syndicate 1084 delivered a Continued on page 5 11 13 18 20 M&A advisory Panel debate Neon Flood insurance Active 2020 Investing in newcos Lloyd’s legacy Protection gap

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#REinsuranceMonth sets Editorial David Bull North American editor Tel: +1 646 895 1765 tone for the path to 1.1 Email: [email protected] elcome to the fifth edition of The was initially slow, it had increased to the Michael Loney North American associate editor WReInsurer, our weekly publication hundreds by the middle of the month. Tel: +1 646 642 0685 throughout September which has brought Several commentators have acknowledged Email: [email protected] you news and insight into reinsurance this month that the future will ultimately Rebecca Hancock European editor market developments. see a hybrid approach to virtual/in person Tel: +44 (0)20 3934 6681 We designated September as working as part of a long-term shift in Email: [email protected] Christopher Munro #REinsuranceMonth to help fill the gap working patterns. As forecast, the future North American associate editor left by the cancellation of Les Rendez- for the ILS market provided major talking Tel: +1 347 421 0504 Email: [email protected] Vous de Septembre, the industry’s annual points during September ahead of the Scott Vincent gathering in Monte Carlo, which was forthcoming retro renewals. News editor cancelled for the first time in 64 years Investor appetite for cat bonds is Tel: +44 (0)20 3934 6685 Email: [email protected] due to Covid-19. We hope our coverage rising but concerns still remain about Sophie Roberts this month has helped fill the vacuum collateralised reinsurance. The potential Content editor left in the industry calendar by the lack for more rated carriers to participate Tel: +44 (0)77 8995 3001 Email: [email protected] of face-to-face events. At the start of the in the retro market in 2021 is clear. Ryan Hewlett month we identified a list of themes which Conversations have also focused on how Senior reporter we thought would have been the major a ‘Class of 2020’ will look. While significant Tel: 44 (0)20 3934 6687 Email: [email protected] talking points had the capital has flowed into the industry been able to industry during 2020, the Advertising, marketing and sponsorship Spencer Halladey decamp to the Côte vast majority of this has Commercial director d’Azur. Many of those We hope our coverage been directed at scale-ups Tel: +44 (0) 203 934 6684 Email: [email protected] themes relate directly this month has helped rather than new entities. Andy Stone to the pandemic. We fill the vacuum left in the We continue our focus on Sales manager now know the outcome these developments in Tel: +44 (0) 203 934 6684 industry calendar by the Email: [email protected] of the Financial Conduct today’s edition. As forecast, Beatrice Boico Authority’s test case on lack of face-to-face events broker consolidation has Marketing manager business interruption remained in the news Tel: +44 (0) 203 934 6685 Email: [email protected] claims (although an throughout the month as Abby Baker appeal is expected). Though the outcome the ramifications of Aon’s merger with Subscriptions manager Tel: +44 (0) 20 7469 2684 was mixed for (re)insurers, claims Willis Towers Watson continue to capture Email: [email protected] impacts look less severe than originally attention. With the deal expected to Production forecast. The industry’s reputation complete in the first half of 2021, a host of Paul Sargent suffered following Covid-19 and this was medium sized brokers are positioned to Creative director examined in the first of the four virtual take advantage of any opportunities that Tel: +44 (0) 20 7469 2685 Email: [email protected] panel discussions we hosted this month. emerge. And discussions around future public- One topic that will play out over Publishing Peter Hastie private pandemic reinsurance solutions the next five weeks, likely in dramatic Managing editor continued through the month. Within fashion, is the US presidential election. Tel: +44 (0) 203 934 6686 Email: [email protected] our coverage, we revealed the European The election could have ramifications Commission (EC) is to form an official for the (re)insurance sector, particularly Head office World Business Media Limited working party to examine the merits of a if it ushers in a more claimant friendly 15 Bishopsgate, London EC2N 3AR future public-private pandemic approach. We will be keeping a watching Info Email: [email protected] (re)insurance solution that could operate brief on this as the story develops in the Published by World Business Media Ltd on a pan-Europe basis. Hurricanes were run up to November’s election. © World Business Media Limited 2020 All rights reserved. No part of this publication maybe reproduced, a regular theme throughout September While #REinsuranceMonth is nearly over, stored in a retrieval system, or transmitted in any form or by any means, electrical, mechanical, photocopying, recording or but losses, for the most part, appear we will continue to bring you extensive otherwise without the prior written permission of the publishers. The views expressed in The Insurer magazine are not necessarily relatively modest to date. Changing news and insight ahead of the 1 January shared by the publisher, World Business Media Limited. The views expressed are those of the individual contributors. No liability dynamics in working practices were 2021 renewals. The themes identified over is accepted by World Business Media Limited for any loss to any person, legal or physical as a result of any statement figure or fact another theme we identified at the start of the course of the past month will continue contained in this title. The publication of advertisements does not reflect any endorsement by the publisher. the month. Lloyd’s re-opened its doors at to have ramifications for the sector as this the start of September, and while footfall unprecedented year draws to a close. www.theinsurer.com #REinsuranceMonth | Week 5 Your business challenges

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Continued from page 1 profit of $101.5mn, carrier Ark in looking to set up shop compared to a loss of $30.1mn the in Bermuda and capitalise on the previous year and a combined ratio that hardening specialty (re)insurance A timeline of improved 8.4 points to 95.2 percent. market. Chaucer’s planned Class 4 is not its As first revealed by this publication first foray on the island. In 2017 the in June, Ark is looking to raise $750mn carrier launched a reinsurance sidecar to $1bn and form a Class 4 Bermudian with support from third party capital reinsurer. to provide collateralised reinsurance The carriers join a growing list of capacity for its Syndicate 1084, Thopas incumbents who are seeking to scale-up 1996 Stewart Syndicates – which started Re. since the outbreak of Covid-19, with the life as a Lloyd’s managing agency Thopas Re entered into an exclusive period of distress brought about by the in 1922 – renamed Chaucer quota share agreement with Chaucer Covid-19 pandemic – as well a sustained to reinsure a share of Chaucer’s US period of catastrophe losses and issues 1997 Management buyout of Chaucer Syndicates completed and international property catastrophe surrounding casualty reserves – making portfolio from 1 January 2018. the ripe not only for scale-ups but for 1998 Chaucer Syndicates quoted on new entrants as well. In 2018, Chaucer was sold by US London Stock Exchange following specialty carrier The Hanover to China Fellow Lloyd’s carrier Ark is currently merger with Aberdeen Lloyd’s Re in a $950mn deal. Following the raising ~$800mn which would see the Insurance Trust transaction, Chaucer also became the firm convert its existing Class 3 Bermuda managing agent for China Re’s Syndicate carrier into a Class 4 carrier while 2019 1999 Chaucer acquires Danish 2088. start-up Convex is currently undergoing reinsurance operation, Since then, Chaucer – which is led by a capital raising exercise which will Chaucer Underwriting CEO John Fowle – has made a number of likely see additional capital injected A/S strategic hires as it looks to build out its into its Bermuda operating subsidiary. international footprint. 2002 Chaucer assumes the management of Nuclear Syndicate 1176 Earlier this month, this publication The ReInsurer comment: revealed Chaucer had hired Axa The industry’s post Covid-19 fund-raising 2004 Syndicates 587 and 1096 merge XL’s former head of Latin America and expansion continues with news of into Syndicate 1084 reinsurance April McLaughlin to lead its Chaucer’s application. own treaty operation in the region. Lloyd’s focus on limiting its cat 2011 Chaucer joins The Hanover In April, the carrier named former XL business – a key factor in rating Insurance Group, Inc. Catlin executive Paul Jardine as non- agencies’ scrutiny of the market after executive chairman. the 2017-18 losses – may have also been 2015 Chaucer Miami opens Chaucer follows fellow Lloyd’s a factor in its move...

Bermuda remains market of choice for cat opportunities 2017 Chaucer Dublin opens Chaucer MENA opens Lloyd’s tough stance on keeping the market’s growth in check means those Chaucer establishes Thopas Re, a looking to significantly grow their appetite for property cat risk may have to look new reinsurance sidecar outside the Lime Street market. And Bermuda remains the market of choice for those looking to create a vehicle 2018 China Re completes the acquisition that can quickly capitalise on what are widely considered to be some of the most of Chaucer from The Hanover favourable pricing trends for reinsurers for several years. Insurance Group, Inc. Bermuda’s favourable regulatory regime allows for a speed to market which other jurisdictions struggle to match. It also provides an existing market 2019 Chaucer becomes the infrastructure and community of reinsurance market professionals. managing agent for China Re’s Syndicate Growing within a Lloyd’s framework can be tough given the desire of the 2088 Corporation’s management to restrict market-wide growth to a single-digit percentage in 2021. For those looking to substantially grow property cat portfolios, 2020 ‘Chaucer in Bermuda’ Class 4 the route being pursued by Chaucer enables the new entity to be up and running reinsurer launches in a short time span. For Chaucer, it also compliments the firm’s global operations, with the company already having a presence in Dublin, Copenhagen, Singapore, Dubai and Miami. The arrival of Chaucer and others in Bermuda could help fill gaps in placements as market hardening continues at 1.1.

www.theinsurer.com #REinsuranceMonth | Week 5 6 | News

Continued from page 1 of the balance sheet for reinsurers means that a 100 basis points fall in interest rates needs to be countered by a 300 basis points increase in rates.

Interest rates ‘catastrophe’ A year ago there had been the expectation that interest rates would continue to move incrementally up. But the actions of governments and central banks in response to the Covid-19 economic shock means that instead interest rates have moved the other way in 2020. For Axis Re’s president of North America Jason Busti low interest rates are “nothing short of a catastrophe for long- tail lines”. As Barclays equity analyst Ivan Bokhmat noted in our latest virtual debate last week, US interest rates have liability, with some segments of the by social inflation could not have been dropped by 1.5 percent so far, “so it’s very business in true hard market territory. contemplated in underwriters’ pricing easy to comprehend why rates [pricing] They also noted the benefits coming and terms and conditions over the last have to go up”. through on quota shares and excess decade. That means liability lines require The theme was picked up by Swiss of loss from moves by insurers to de- significant rate increases over multiple Re’s head of casualty underwriting for risk and improve the quality of their renewal seasons if they are to catch up reinsurance Jason with loss cost Richards. trends. Noting that Industry-wide US casualty accident year loss ratios “We now see interest rates have Positive development that prices need dropped by as 69 to be in the much as two points Adverse development double digit range 67 in some areas, he in the liability said that a “lot of % 65 lines for a few action” is needed 63 years, not just to account for the 61 one year, for five or six points 59 a few years, in impact that has on 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 order to be able profitability. to catch up with Current loss ratio Initial loss ratio He suggested the loss cost,” that reinsurers will Source: Swiss Re Institute, SNL the executive push for tighter suggested. terms and conditions on wordings and portfolios by shortening limits and Busti said that there are signs that rate also apply pressure on commission tightening T&Cs. increases could be starting to outpace levels, with “many” contracts that have loss trends. cedes set too high. Loss cost trends “But we don’t know necessarily where “There’s still many contracts with But executives have also questioned the starting point is, and there are many commissions in the mid-thirties. They whether the improvements being seen macro variables right now that are need to come down from a reinsurance are enough to keep pace with loss cost influencing and will influence the run-off perspective,” he argued. Reinsurer trends as social inflation shows no sign of casualty,” he warned. executives spoken to by this publication of diminishing. Speaking to The ReInsurer, For Busti, further increases on all acknowledged the meaningful Swiss Re’s reinsurance CEO Moses underlying pricing need to be combined improvements being seen on underlying Ojeisekhoba said it is “abundantly clear” with lower cede commissions for pricing in casualty and professional that the scale of claims being driven reinsurers, to ensure that there is

#REinsuranceMonth | Week 5 www.theinsurer.com News | 7

alignment of interests between the parties on a treaty. US 10 ear Treasury Note rate slides 4% Client selection While there is strong agreement among 3% reinsurers that pricing and terms must improve across the board at 1.1, they generally claim that they will continue 2% to treat each cedant on their individual merit rather than look to take a blanket 1% approach to the renewal. Axis Re CEO Steve Arora told this publication that with many unknowns 0% – including around the ongoing impact Jan 18 Jul 18 Jan 19 Jul 19 Jan 20 Jul 20 of Covid-19 – it was unclear at this stage whether underwriters should restrictions. And the clients just didn’t Chandler said he and his colleagues do be defensive, expansive or maintain a buy,” said Marcell. expect pressure on casualty quota share neutral position in casualty. “If that comes back to the fore it will be ceding commissions from reinsurers, but But he said that for a reinsurer a mistake. All they will achieve is driving said clients’ use and understanding of identifying the best cedants in this buyers away, leaving them with those data will play a key role in fighting back marketplace is critical to maintaining a that really need the cover even at those against such moves. profitable book of business. terms and conditions as their clients, Reinsurance buyers that are able “I think you really need to select the which generally doesn’t work out well for to provide a greater depth and better partners you believe are going to do well them,” he suggested. understanding of their data compared over the cycle and in the future, so I think There have been more forceful with their peers will benefit when it there will be a heavy emphasis on client responses from brokers, however. comes to negotiating terms, he added. selection,” he predicted. “[Clients that] can point to the Arora added that reinsurers supporting Broker pushback underwriting acumen and the changes insurers on a quota share basis need the Also speaking to The ReInsurer, BMS Re that have been made in their policy rate improvements as well as a “stronger CEO Pete Chandler said brokers will “push forms and their pricing paradigms portfolio”, with insurers management of back hard” against further attempts from will continue to generate a ceding limits one factor that can help achieve reinsurers to reduce ceding commissions commission on quota shares with a 3 in that. for US casualty quota shares. front of it,” said Chandler. Reinsurance brokers spoken to by this publication have largely acknowledged PL opportunity draws MGA start-ups the pressures expected at 1.1 in casualty, but have emphasized the importance The hard market for underlying US casualty and professional liability insurance of treating cedants on an account-by- risk is attracting a wave of new ventures to target the opportunity, including start- account basis. up carriers and MGAs supported by (re)insurers. Aon’s Reinsurance Solutions CEO This publication revealed earlier this month that former Markel, Alterra and XL Andy Marcell said that so far, despite executive Mark Boylan is launching Arcardian Risk Capital backed by a Third Point modest reductions in quota share ceding Re investment and capacity to initially target the excess casualty and professional commissions, reinsurers have been liability space from Bermuda, London and New York. focused on evaluating cedants at an The start-up will deploy capacity low down on placements with its $15mn line individual client level to understand the including reinsurance support as it selectively builds out its portfolio. original rate change and the way that Meanwhile, Stephen Sills’ specialty start-up with US insurer American Family is limits are being managed. also targeting low excess layers to build a sustainable professional liability, excess That is in contrast to the aftermath of casualty and medical liability portfolio. 9/11 when a “knee jerk reaction” from The initial structure sees Sills and his team write as an MGA on American Family reinsurers saw them impose significantly paper with a capitalized reinsurer sitting behind the carrier after securing funding reduced cede commissions and demand from private equity firm Gallatin Point as well as BlackRock. loss ratio caps and loss corridors. It will deploy similar line sizes to Arcadian. “Even though there were a lot of rate And among other entrants, veteran D&O specialist Greg Flood has joined MGU rises they said ‘we can’t do that anymore’ Balance Partners to launch a start-up program with a focus on financial lines and and reinsurers that were going to stay professional liability. in said they would impose significant www.theinsurer.com #REinsuranceMonth | Week 5 8 | News

Reinsurers monitor FCA discussions as appeal applications are lodged

he UK’s Financial Conduct Authority judgement earlier this month. deadline as discussions between the T(FCA) and a number of UK property This morning (29 September), the parties continue. insurers remain locked in negotiations FCA and a number of the UK insurers The ReInsurer understands that which – if successful – could prevent an involved in the case confirmed they the insurers – in tandem with their appeal to the Supreme Court following have lodged precautionary appeal reinsurers – are attempting to gain the groundbreaking Covid-19 test case notifications ahead of yesterday’s clarity on a number of issues that

RSA upgraded despite continuing appeal uncertainty Despite the ongoing prospect of an appeal, analysts have He argued that while the prospect of the appeal had not continued to respond positively to the FCA decision as giving rescinded while talks are ongoing between insurers and clarity to UK insurers’ Covid-19 BI exposures. the FCA, he added: “it’s our view that the initial ruling is In a note titled “Time unlikely to be altered, to Break Free” and RSA TD share price… especially as almost all published this morning stakeholders appeared (29 September), Jefferies 600 to declare victory in the International analyst immediate aftermath” Philip Kett lifted his 500 He continued: “For

price target on RSA to Pence [RSA] shareholders, we 600p (vs opening 460p), 400 believe that a lower risk commenting: “With premium is warranted, the key headwinds 300 justifying the re-rating”. (FCA test case and Mar 2020 May 2020 Jul 2020 Sep 2020 Jefferies made similar lack of dividends) now comments on Hiscox, resolved, we believe that RSA’s shares have been materially whose share price climbed 17 percent immediately following de-risked”. the mid-September High Court judgement.

#REinsuranceMonth | Week 5 www.theinsurer.com News | 9

emerged from the test case, specifically £10mn of leakage. provides cover. around areas such as the application of In a 162-page judgment on 15 The Court held, across all policies, trends clauses and BI loss measurement September, Mr Justice Butcher and that on the key causation argument run issues generally. Lord Justice Flaux ruled in favour of by the insurer defendants in assessing In a statement this morning (29 policyholders in the majority of the 21 how a counterfactual, “but for” test September), the regulator said: “Positive policy wordings that have come under or “business trends” clause should be discussions continue with all parties”. scrutiny in a test case brought by the applied, one starts with the insured While Hiscox – one of the leading FCA in July. peril itself. insurers involved in the test case – said: In doing so, it also tilted English The eight insurers relied heavily upon “In order to preserve the ability of insurance law more in favour of the the decision in Orient Express Hotels any appeal to proceed straight to the insured after a number of recent BI Ltd v Assicurazioni Generali to support Supreme Court, Hiscox, together with decisions over both causation and their case on causation and the trends certain other insurers and the FCA, has quantum which have been regarded as clauses. taken the necessary procedural step of pro-industry in their impact. The Court dismissed the insurers’ applying to the High Court for a leapfrog The judgment said most, but not all, arguments and distinguished Orient certificate before yesterday’s statutory of the disease clauses in the sample Express on the basis that it was “simply deadline for doing so had passed. policies provide cover. This included not concerned with the type of insured “However, Hiscox has not yet made certain denial of access clauses peril” being considered in the case. a decision on whether it will seek to dependent on the detailed wording of In particular, the Court ruled that appeal.” the clause and how the business was the “composite or compound perils” RSA also said in a statement this affected by the government response featuring in the wordings before the morning that it had “followed the to the pandemic, such as whether the Court, contrasted with the “all risks” necessary procedure to seek permission business was forced to close completely nature of the cover in Orient Express. to appeal the court’s findings in the or was allowed to operate in a reduced The Court did not make any findings of FCA’s recent business interruption test way. fact as to where Covid-19 has occurred case at the Supreme Court”. The ruling also clarified that the or manifested. Whether the insured can It added: “RSA understands that the Covid-19 pandemic and the government discharge the burden of proving that FCA and other insurers who were party response were a single cause of the the disease occurred or manifested in a to the court case have also filed similar covered loss, which is a key requirement certain area will need to be determined applications, the deadline for which for claims to be paid even if the policy on a case by case basis, it added. expired yesterday. A court hearing in relation to these applications will take UK commercial insurers participating place on 2 October.” According to sources, reinsurers are in the High Court test case... also closely monitoring the discussions as claims have been made on a number Arch Insurance (UK) Limited of programs, including RSA and Hiscox. Following the test case decision – which broadly went in favour of Argenta Syndicate Management Limited policyholders – carriers were able to gain greater clarity on their gross and net exposures. Ecclesiastical Insurance Office plc Indeed, Hiscox’s share price leapt as it confirmed its net losses would be Hiscox Insurance Company Limited capped at £100mn (worst case £250mn) while RSA said its discussions with its lead reinsurers were “positive”, with MS Amlin Underwriting Limited both sides agreed that their group aggregate reinsurance programme will be triggered. QBE UK Ltd RSA’s H1 estimate for Covid-19 claims was £57mn and, following the ruling, its estimate increased to £104mn gross. But Royal & Sun Alliance Insurance plc once the group’s catastrophe cover kicks in, this should limit claims to £75mn, Zurich Insurance plc although RSA allowed for an additional www.theinsurer.com #REinsuranceMonth | Week 5 BECAUSE INSURANCE DOESN’T HAVE TO BE BLACK & WHITE.

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Slaughter and A-Plan continue Evercore’s active 2020 ew York-headquartered Evercore has A-Plan, adding the UK personal and is also advising Lloyd’s player Ark, Ncontinued to be the most visibly active commercial lines broker to its portfolio which is looking to raise up to $1bn M&A (re)insurance sector advisory firm in of clients. ($800mn equity/$200mn debt) and the Covid-19 fallout with appointments to The firm advised A-Plan on its sale convert an existing Class 3 Bermuda work on James Slaughter’s start-up venture to Hyperion Group, with the £700mn reinsurer into a Class 4. Evercore is as well as emerging as advisor to A-Plan on transaction unveiled last week. advising Convex on a second round of its sale to Hyperion. But it has been capital raises – both fundraising that could take its capital Slaughter – the former chief for incumbents and start-ups – where close to $3bn. The (re)insurer, which was underwriting officer of Liberty Mutual Evercore has been most visibly active in unveiled by Stephen Catlin and Paul Global Risk Solutions – has engaged the P&C market in 2020. Brand last year with $1.8bn of capital Evercore to raise capital for a Bermuda- As previously reported by this ($1.6bn committed) in a launch that based start-up. publication, it is advising a trio of Evercore also advised on, has platforms It is understood that Evercore has Hiscox alumni looking to raise capital in London and Bermuda. JP Morgan is initiated conversations with a number for a new Lloyd’s and Bermuda carrier. also advising Convex on its new funding of private equity houses on behalf of Former Hiscox chief underwriting officer round. Slaughter, who is targeting a 1.1 launch. Richard Watson has teamed up with Beat Capital Partners worked with Slaughter’s planned vehicle is Stuart Bridges and Russell Merrett for Evercore to raise capital to establish its believed to be focused on property that venture. Along with TigerRisk – own 2021 underwriting platform, which treaty, specialty reinsurance and retro. another advisory firm that is busy in the will sit alongside third party capital- Evercore has also recently advised start-up and scale up space – Evercore backed Syndicate 4242 at Lloyd’s. Recent capital initiatives that Evercore has advised on… Carrier Investment/ Advisor Notes target

$1bn Top quartile Lloyd’s carrier led by Ian Beaton looking to raise as much as $1bn and ($800mn equity; $200mn debt) and form a class 4 reinsurer as well as scale up Lloyd’s operations

? Former Ariel chief Tom Milligan and former Willis Re CEO John Cavanagh, Lloyd’s- based capital investment vehicle and underwriting platform secured backing from Bain Capital

~$1bn? The London-Bermuda specialty carrier officially launched in May 2019 with and $1.6bn of initial capital backed by two Canadian investors, PE firm Onex Corp and the pension fund manager PSP. Kick-started a new fundraising round in summer that will bring in fresh equity and debt from existing and new backers. Capital could reach ~$3bn when complete

~$800mn Ex-Hiscox CUO Richard Watson reunited with former colleagues Stuart Bridges and Russell Merrett on a Lloyd’s start-up targeting a ~$800mn fund and raise. Secured $300mn of cornerstone backing from JC Flowers, with further fundraising led by Evercore believed to be ongoing. Expected to launch Lloyd’s syndicate at 1.1 acquired from StarStone run-off with support from Enstar/Stone Lloyd’s MBO/ Point subject to Lloyd’s approval in October 2020 reboot

? Former chief underwriting officer of Liberty Mutual Global Risk Solutions James Slaughter has engaged Evercore to raise capital for a Bermuda-based start-up eyeing 1.1 launch

Source: Company disclosures, The Insurer www.theinsurer.com Week 5 | #REinsuranceMonth 12 | Analysis

Beat was launched in 2017 by former Evercore advising on some eye-catching M&A transactions in 2019 included Ariel Re chief Tom Milligan and former deals announced last year. advising Lee Equity Partners on its Willis Re CEO John Cavanagh to back It advised on the launch of Convex acquisition of K2 Insurance Services entrepreneurial MGAs. in April 2019 and McGill & Partners’ and advising Liberty Mutual on its sale Earlier this month, Beat secured $250mn launch in May 2019. In addition, of Pembroke Managing Agency and investment from Bain Capital Credit to AIG engaged it to advise on its launch of Ironshore Europe to Hamilton Insurance create a dedicated underwriting vehicle. a new HMW syndicate at Lloyd’s. Group. In addition to the start-up and scale-up initiatives currently underway, Evercore is co-advising (along with Evercore’s announced 2019-2020 Barclays) Randall & Quilter (R&Q) on P&C transactions creating a $200mn+ third-party capital sidecar which would see the legacy Announcement Status /Work Transaction Transaction Date Completed Value ($mn) acquisitions group co-invest alongside funds it manages. 23 September Pending Advising A-Plan Group on its sale to N/A 2020 Hyperion Insurance Group

Growing into a major player 15 July 2020 Closed July 2020 Acted as an Active Bookrunner on the $179 Evercore was founded in 1995 and has initial public offering for Trean Insurance grown into a leading corporate adviser. Group Its $1.7bn of global advisory revenue 24 June 2020 Closed June 2020 Acted as a Joint Bookrunner on the follow- $94 in 2018 placed it behind only Goldman on offering for Palomar Holdings Sachs, JP Morgan and Morgan Stanley, but ahead of such names as Lazard, 10 June 2020 Pending Advising Fidelis Insurance Holdings Limited $500 on its equity capital raise Rothschild, Citi and Bank of America. Its pre-eminence in insurance was 20 May 2020 Closed May 2020 Acted as an Active Bookrunner on the ~$656 spring-boarded by its acquisition of initial public offering for SelectQuote London-based financial institutions advisory firm Lexicon Partners in 2011 23 March 2020 Closed April Advised Kingsbridge Group on its sale to NA for £86mn. Evercore’s Lloyd’s focused 2020 NSM, a wholly owned subsidiary of White fundraising initiatives are being led Mountains Insurance Group by Mark Hennessy, the co-head of its 2 March 2020 Closed April Advised Charlesbank Capital Partners NA financial institutions group. 2020 LLC on its acquisition of World Insurance The financial advisory firm has Associates LLC already had a busy year for announced 11 February 2020 Closed February Advised Fidelis Insurance Holdings Limited ~$300 insurance transactions, not taking the 2020 on its equity capital raise start-up and scale up initiatives that it is currently advising on into account. 3 February 2020 Closed June 2020 Advising Global Risk Partners Limited on NA its majority investment from Searchlight It acted as a bookrunner on the Capital Partners IPOs of worker comp-focused program carrier/MGA Trean Insurance Group, 9 January 2020 Closed January Acted as a Joint Bookrunner on the follow- $282 which floated last month, and insurance 2020 on offering for Palomar Holdings price comparison website SelectQuote, 23 October 2019 Pending Advising American International Group on NA which went public in May. Evercore the launch of a new syndicate at Lloyd’s has also advised Fidelis on two capital 14 May 2019 Closed July 2019 Advised Lee Equity Partners, LLC on its NA raises worth a combined $800mn this acquisition of K2 Insurance Services, LLC year, as well as working on two follow- on offerings for Palomar Holdings 2 May 2019 Closed May 2019 Advised McGill & Partners on its launch ~$250 and initial equity commitment from worth $386mn. It has also been active Warburg Pincus in M&A, advising Kingsbridge Group on its sale to White Mountains’ NSM, 30 April 2019 Closed April 2019 Advised Convex Group on its launch and $1,800 advising Charlesbank Capital Partners capital raise on its acquisition of World Insurance 14 March 2019 Closed August Advised Liberty Mutual on its sale of NA Associates, and working for Global Risk 2019 Pembroke Managing Agency and Ironshore Partners on its majority investment from Europe DAC businesses to Hamilton Insurance Group Searchlight Capital Partners. All of this 2020 activity followed Source: Evercore

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David Bull Dalynn Hoch Ivan Bokhmat

PK Peran Jim Stanard Dinos Iordanou

Investors drawn to start-ups with superior underwriting skills Investors are putting money into newcos to back teams they believe have “superior underwriting skills” because that’s where earnings will be generated in a hard market opportunity that coincides with a low interest rate environment, former Arch chairman and CEO Dinos Iordanou said on the latest panel debate brought to you by The ReInsurer

s previously reported, Iordanou is Aworking on a (re)insurance start-up Participants: and is understood to have secured backing from private equity firms Hellman Friedman Ivan Bokhmat, European Insurance Analyst, Barclays and The Carlyle Group. Dalynn Hoch, Head of Group Mergers & Acquisitions, Zurich Insurance Speaking on The ReInsurer’s latest virtual debate panel discussion last Company week, the executive wouldn’t comment on specific details of his new venture. Dinos Iordanou, Former Chairman/CEO, Arch Capital Group Ltd. But he provided insights into the rationale for launching a start-up and PK Paran, Global Co-Head of Insurance, DLA Piper of investors in backing newco carriers Jim Stanard, Former Chairman and Co-Founder, TigerRisk Partners as he highlighted opportunities he sees in specialty and cat reinsurance, as well David Bull, North American editor, The Insurer (Moderator) as specialty insurance. Iordanou drew parallels between the current start-up opportunity and www.theinsurer.com Week 5 | #REinsuranceMonth 14 | Virtual debate

the Class of 2001, when a pricing and execute in the marketplace,” correction that had already he said. started in Q2 2000 was accelerated During the debate, fellow by the September 11 attacks the panelist PK Paran, global co-chair following year. of DLA Piper’s insurance practice, “Looking at the market today we backed up the comments about have a lot of similarities, the rate investor focus on underwriting increases and correction started track records. because of the lack of lift from the He pointed to PE firms such asset side of the balance sheet… as The Carlyle Group and and the emergence of severity Blackstone that have invested in trends on the liability side which the sector and gained a strong necessitated price correction in the understanding of it, adding personnel market,” he observed. Putting a strategy together and to their own operations that have deep “Then Covid-19 comes and it creates industry expertise. uncertainty. So it has a similar feel to finding capital is the easy part. “Funds like that are here to stay. They the 2001 time frame and for that reason The difficult part is to find are really investing in management there is quite a bit of interest from the people that are going to teams and businesses as a whole and private equity and other investors to they really understand the importance put money into newcos. They prefer implement that strategy and of the underwriting,” Paran said. new teams, no old liabilities and execute in the marketplace the ability to enter the market in a Dinos Iordanou on finding “A+ talent Lower return expectations welcoming environment,” Iordanou Speaking on the same panel, the continued. founding former CEO of RenaissanceRe The investment environment and TigerRisk co-founder Jim for (re)insurers with low interest Stanard suggested that the rates means their interest is current opportunity looks only in backing start-up teams different from those he has they believe have superior previously engaged in because underwriting skills, as they expect cycles are “less peaky” and “the most of the earnings will emanate business is getting smarter”. from underwriting activity, not the “Some of the things that drove asset side of the balance sheet, cycles in the mid-80s and 90s he said. were really bad underwriting and “And they also understand misunderstanding returns in the that the market is open to new business in addition to shocks on entrants, meaning the capacity they’re the loss side. going to bring to the table, especially Some of the things that drove “I think that organizations are if coupled with capable underwriting smarter now and some of the excess teams, is welcomed by the clients and cycles in the mid-80s and 90s returns available in those early cycles the distribution channel,” Iordanou were really bad underwriting are not available in a cycle like this,” he added. and misunderstanding said. “Only in a hard market are new But in a low interest rate environment entrants welcomed… that’s what we returns in the business in the executive suggested that the see and we’re trying to see if that’s an addition to shocks on the loss alternatives available to investors are actionable set of circumstances,” said side. I think that organizations a lot less attractive, which means the the former Arch executive. expected returns needed to attract He added that key to decisions are smarter now and some of capital to the insurance sector are around building out a start-up would the excess returns available likely to be lower. be the ability to attract “A+ talent” to in those early cycles are not As previously reported, Stanard is the segments where opportunities understood to be actively looking exist. available in a cycle like this at opportunities in the sector and is “Putting a strategy together and Jim Stanard on lower return believed to be a party in the Ariel Re finding capital is the easy part. The expectations sales process. difficult part is to find the people that Stanard wouldn’t comment on are going to implement that strategy specific opportunities but did say that

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there had been a shift from the virtual debate. mantra of size as an imperative to Zurich’s head of group M&A survival. Dalynn Hoch said that companies “I think now we’re in the part of had adjusted to the virtual the cycle where you’ll see some of environment and would continue the smaller things start pushing to deploy capital as they had back against the idea that you before, with 2021 expected to be a can’t survive if you’re not big,” “busy year”. said the market veteran. Zurich’s Dalynn Hoch on how He agreed with Iordanou about a focus on core operations is the ability that hard market driving M&A conditions give a start-up to get access There continues to be consolidation to business. You’re starting to feel in for scale and for diversification, as well “That’s the hardest thing for a start- the second half of 2020 as a re-emergence of take-private deals up, to acquire business. It’s not even as well as going into 2021 and IPOs. so much the profit margins available, more transactions around “But I’d say a really important topic it’s just that you can get the business we’re hearing is focus. The conversation which you can’t really do in the soft businesses that perhaps coming out of CEOs and from market without getting killed,” said for one carrier are non-core discussions with other carriers and Stanard. but could fit really well with companies is the need to have focus on Meanwhile, Barclays equity another carrier and their the core and think about what we do analyst Ivan Bokhmat said that the with the non-core. fundamental relationship between book of business “You’re starting to feel in the second investments and premium for carriers Zurich’s Dalynn Hoch on how a focus half of 2020 as well as going into 2021 will maintain upwards pressure on on core operations is driving M&A more transactions around businesses rates. that perhaps for one carrier are non- Barclays equity analyst Ivan Bokhmat core but could fit really well with on the imperative for rate another carrier and their book of increases business,” said Hoch. For reinsurers in particular, DLA Piper’s Paran described he noted that the ratio between the situation in the early days of investments and premiums Covid-19, when “one deal after means that a 100 basis points another” was being put on pause. fall in interest rates needs to be Well-advanced transactions countered by a 300 basis points were more likely to be taken to increase in rates. completion as parties wanted to “In fact US interest rates have see them through and were able been down 1.5 percent so far, so to adapt to the new environment it’s very easy to comprehend why to finish them remotely. rates have to go up,” he said. But some larger strategic With social inflation in the US, transactions were paused as groups Covid-19 and other large loss activity, Groups now want to move looked to get to grips with the “so far it feels as if the balance of new forward, they’ve got to grips pandemic and focus on employees. versus retired capital has still generally with it to a certain extent, “But now just as all those deals been in favour of market hardening”, he were put on pause at the same time, added. they may want to recast a number of them are coming back financials where there has online. M&A flow picks up after Covid been the impact of Covid “Groups now want to move forward, pause directly on a line of business they’ve got to grips with it to a certain After a Covid-19 driven lull, the volume but they really want to get extent, they may want to recast of M&A activity is picking up through financials where there has been the the latter part of 2020 and is expected going again in the real world impact of Covid directly on a line of to gather pace into next year as buyers DLA Piper’s PK Paran on the end of business but they really want to get and sellers focus on core operations the M&A pause going again in the real world,” he in the current market environment, reported. according to participants in our latest www.theinsurer.com Week 5 | #REinsuranceMonth 16 | Interview

ILS funds could move towards pandemic risk as reinsurers step back

ILS investors have an opportunity in pandemic risk whereas Covid-19 is more like a 1-in-10 or 1-in-20 year because reinsurers are wary amid Covid-19, despite event, Dutkiewicz explained. the sector still being profitable in 2020, according “This isn’t actually an extreme mortality event,” he said. “This line of business has been profitable and to Colin Dutkiewicz, global head of life for Aon’s will be profitable in 2020 for those reinsurers.” Reinsurance Solutions business Three types of reinsurer asual observers of the life and health market may The executive identifies three categories of reinsurers. Cbe surprised to hear that the market for pandemic The first is the big traditional multiline reinsurers. reinsurance cover, which sprung up in response to Solvency “They have this accumulation of the pandemic risk II coming into effect in 2016, has remained profitable this themselves and they actually want to offload this risk, year. they want to retro it,” he said. “But they do write life The cover is designed to protect against very insurance quota share reinsurance, so they are taking unlikely outcomes such as a 1-in-200 year event on normal business that adds to their pandemic load.

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But what they also have is a whole bunch of longevity worked before you had a pandemic. Once you are in a risk, and that is an offsetter. pandemic, things change. “So [the pandemic] is not a solvency event for them, “So the method of modelling has changed from the it is barely a profit/loss event for them. But they don’t stochastic modelling of something you thought was want to load up more of this cover.” going to happen to scenario base modelling of what The second category of reinsurers are the slightly is happening. Now if you are running an insurance smaller reinsurers, such as PartnerRe and QBE, which company you have to say: ‘Well, here are five different are happy to write the business and understand it scenarios of what can happen, I need to make my well. “They are very effective at writing it, and they organisation robust in light of all those scenarios.’” are innovative and are hungry for business,” said One of the biggest surprises from the reality of Dutkiewicz. the pandemic has been the risk factor of the country The final category is the ILS funds. involved. The models basically assumed that if a “They are always trying to access the life space, and country had a good pandemic plan it was a good I think they will get going now,” said Dutkiewicz. “This risk, and vice versa. “Of course, what has happened is kind of their time.” is not that,” said Dutkiewicz. “The nations that have Life insurers did not feel the got it right and the nations that need to go with an unrated ILS have got it wrong have been fund when there was sufficient completely surprising.” capacity and prices were coming Dutkiewicz noted that the down. “Suddenly capacity biggest issue now from a reduces, the big traditional mortality perspective is not the reinsurers are reticent and the Covid deaths but issues such as middle-sized reinsurers which deaths from people who did not were writing it start cutting back go to cancer screening during or reducing capacity,” he said. the pandemic and reductions in “The ILS funds can step in health spending under austerity and say, ‘We know it is a good measures in a recession. risk, we have got the capacity, He said the modelling “was yes we underwrite it but we can Suddenly capacity reduces, fit for purpose” but will evolve. collateralise it.’ So suddenly that the big traditional reinsurers “The broad-brush stochastic side of the market is taking off are reticent and the middle- modelling we were doing on in terms of capacity provision.” pandemics is going to give way For ILS funds, pandemic sized reinsurers which were to a much more granular cause life risk is not correlated with writing it start cutting back of death model,” he said. the markets and also offers or reducing capacity. The ILS “The reinsurance covers a diversifier from natural have worked as expected catastrophe cover. funds can step in – they comprise detailed He said a number of Colin Dutkiewicz, global head of life for contracts covering a lot of reinsurers that have suffered Aon’s Reinsurance Solutions business eventualities, every single losses on the non-life side from one of those eventualities has event cancellation and business been completely understood interruption have stopped and validated, the reinsurance writing pandemic on the life was written in the right way.” side. “Which makes no sense because it is profitable In terms of reinsurance performance in this area, on the life side,” he added. however, Dutkiewicz said the next few years will present challenges for those in the market. Models shift to scenario based “It is complicated now,” he said, “but the next three Dutkiewicz reported that Covid-19 has not disproved years are even more complicated with actually bigger the modelling of pandemic risk. He said Aon’s impacts than what we are seeing this year. calibrations were from 1918 Spanish flu, outbreaks in “It is a longer slower burn for life reinsurers than 1956 and 1965, and 2003 Sars. it is for non-life reinsurers who can get out of a line “The modelling had the reality covered completely,” tomorrow. The life market is $180trn of exposure, and he said. “The caveat to that though is that what we no reinsurer can get out of one dime of that exposure were doing is the stochastic modelling where we next year. So they have a longer term view of this with were modelling 10,000 possible outcomes from the these more complicated issues going on that they horrendous ones to the not so horrendous ones. That have to figure out.” www.theinsurer.com Week 5 | #REinsuranceMonth 18 | Analysis

Riverstone’s Lloyd’s streak continues with Neon

airfax-owned Riverstone’s acquisition of Neon is further This publication understands that the potential back- Fevidence of the run-off specialist’s continued appetite for year deal is for business written by its Lloyd’s business Lloyd’s legacy business. Syndicate 1200. The deal announced yesterday will see Riverstone As reported earlier this month, Riverstone, along with acquire Neon’s parent company, GAI Holding Bermuda, Bermudian run-off giant Enstar, had made it through from parent company American Financial Group (AFG), to the next round for the Argo Lloyd’s portfolio with finalising the US specialty carrier’s exit from the Lloyd’s reserves of £357mn ($458.5mn). market. The process – which is being managed by Willis Towers The transaction – which remains subject to regulatory Watson (WTW) – relates to the 2017 and prior year of approval – is set to close in the fourth quarter. account for Syndicate 1200. Last month this publication revealed that Riverstone This publication understands that Argo has explored was shortlisted in talks to acquire Neon, which entered a number of structures for the deal, including a loss run-off in January this year despite the syndicate having portfolio transfer (LPT) and a reinsurance-to-close (RITC). its 2020 business plan and capital structure approved by In June, Riverstone effectively acquired the defunct Lloyd’s. Skuld Syndicate 1897 via the purchase of its corporate AFG said it expects to release all of its funds at Lloyd’s members. The deal – brokered by WTW following following completion of the deal, including the release a tender process – saw the transfer of total assets of the letters of credit and collateral pledge facility that of £95.8mn; gross provisions of £123.87mn and net AFG guarantees in support of Neon’s provisions of £98.4mn at 31 Dec funds at Lloyd’s. 2019. TigerRisk Capital Markets & The legacy carrier – which Advisory served as exclusive operates at Lloyd’s via Syndicate financial advisor to AFG for the The uptick in demand for legacy 3500 – has also undertaken a RITC transaction. transactions has also been driven in of Scor’s Syndicate 2015 (Channel In 2019, Neon booked £435.4mn part by the Covid-19 pandemic, as Syndicate) on it’s 2017 and in gross written premiums, an prior years and a RITC of Mitsui increase of £30.3mn on the previous (re) insurers increasingly look to Sumitomo’s defunct Syndicate year, with the 2018 year of account restructure their portfolios 3210, with gross and and net marking an 80 percent jump in GWP technical provisions of £560mn from £225.7mn. and £419mn respectively. The Neon acquisition is one of In 2018, it provided an LPT several legacy deals being pursued by Riverstone, with for stablemate Brit Syndicate 2987 with gross and this publication last month revealing that the Luke net provisions of £135.6mn and a separate LPT for an Tanzer-led firm was active in eight run-off acquisitions unnamed Lloyd’s syndicate with gross and net provisions with net reserves in excess of $2bn. of £63.8mn. Lloyd’s has been the subject of heightened Another live process Riverstone is involved in is a back legacy deal activity as a number of retrenching or year deal for Apollo Syndicate 1969. shutdown syndicates in the post-‘Decile 10’ environment As revealed by The Insurer, Apollo has engaged Guy look for full or partial run-off solutions. Carpenter to advise on a potential Lloyd’s legacy deal The uptick in demand for legacy transactions has also with reserves of circa £130mn ($169mn). been driven in part by the Covid-19 pandemic, as (re) Apollo is one of a number of Lloyd’s syndicates insurers increasingly look to restructure their portfolios exploring a legacy solution which would free up back to either put under-performing units into run-off or year capital to support front-end underwriting at a time release solvency capital via back-year transactions. of improving market conditions. The fallout from Covid-19 losses is also expected to Riverstone is also in talks over an Argo portfolio which spur further activity at One Lime Street as insurers look is being marketed by Willis. The Bermudian-domiciled to free up capital via back-year deals. Earlier this month, carrier first brought the long-tail US liabilities portfolio S&P warned of more syndicate closures at year-end. to the market last year.

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Riverstone Lloyd’s legacy transactions since 2018... September Neon 2468 The deal sees Riverstone acquire Neon’s parent company, GAI Holding Bermuda, 2020 from AFG, finalising AFG’s exit from the Lloyd’s market

Jun 2020 Skuld 1897 Acquires corporate members from run-off, loss-making Lloyd’s Syndicate

1 Jan 2020 Scor Channel Syndicate RITC of Scor Syndicate for 2017 and prior years, transfer equivalent to gross and net technical provisions of £180.3mn and £116.7mn

1 Jan 2019 Mitsui Sumitomo Syndicate 3210 RITC of 2016 and prior years; gross and net technical provisons of £560mn and £419mn respectively

1 Jan 2019 Advent Syndicate 780 Takes over management and is expected to undertake RITC at Dec 2020 year end. Total outstanding claims, gross of reinsurance, was $250.4mn at 2019 year- end

21 Dec 2018 Unnamed Syndicate LPT of 2017 and prior years, equivalent to gross and net provisions of £63.8mn

30 Nov 2018 Brit Syndicate 2987 Gross and net provisions of £135.6mn

Supply and demand legacy space, in recent years including giant AIG As more syndicates look to gauge the appetite of spin-off Fortitude Re, Bill O’Farrell’s Arch-sponsored Lloyd’s legacy counterparties, both seasoned and Premia Holdings, Fleming Re and Karl Wall’s Carrick start-up legacy reinsurers are also raising capital and Specialty. building out their ranks. However, Lloyd’s insistence that RITC transactions The Lloyd’s legacy market – traditionally dominated are retained internally restricts the ability of legacy by three acquirers: Enstar, Riverstone and R&Q – has providers to provide solutions without a Lime Street seen a flurry of newer entrants. platform. Newcomers include Marco, which this publication Premia’s purchase of Charles Taylor’s run-off revealed was set to launch in July with Eur500mn of Standard Syndicate 1884 and managing agency last backing from PE house Oaktree Capital. year also gave the legacy carrier a Lloyd’s platform, The start-up – led former Darag CFO Simon Minshall which its newcomer competitors currently lack. – also says it has a further Eur250mn in accessible Of the established legacy acquirers at Lloyd’s, R&Q “dry powder equity” ready to be deployed and has its recently added fire power to its run-off capabilities eyes set on a Lloyd’s platform. with a $100mn equity raise backed by 777 Partners Marco is one of several start-ups to enter the and HSCM (see table). Active legacy deals in Lloyd’s market Carrier Syndicate Net reserves (£) Intermediary YoA Notes

Pembroke/Liberty 4000 $457mn ? 2019 and prior? Hamilton acquired the Pembroke Syndicate/ Lloyd’s platform from Liberty Mutual last year. Follow $60mn LPT with R&Q on Syndicate 3334 which completed earlier this year Canopius 4444 £1bn GC Unknown Engaged Guy Carpenter in June to explore major legacy solutions that would allow the carrier to free up capital Apollo 1969 £130mn GC 2017 and prior The back years’ deal involves a number of lines of business, including D&F property, casualty, marine, energy and construction, among others Vibe 5678 £250mn WTW 2008 – 2019 The book relates to the 2008 – 2019 years of account and encompasses classes including A&H and general liability Argo 1200 £350mn WTW 2017 and prior One of a number of legacy solutions being explored by Argo. Others include a European (Italy/Malta) run-off deal and US casulaty www.theinsurer.com #REinsuranceMonth | Week 5 20 | Comment

Insurers running to flood, not away from it The impacts of Covid-19 and a faltering global economy mean the insurance industry is facing unprecedented headwinds. So now more than ever, it’s crucial to tap into new risk pools and seize fresh revenue opportunities when they come along. And when it comes to flooding, there’s more than enough business to go around, says Matt Junge, head of property solutions for US and Canada at Swiss Re

Giant-Sized Opportunity 48 states, the research pegs the market opportunity Consider these numbers: $2.6bn in California, $1.3bn at nearly $38bn. With those kinds of numbers and in North Carolina, and $1.1bn in Florida. reliable modeling, it’s time to get in the game. Those are the premiums insurers could stand to Until now, the inability to effectively underwrite make in each of those states, according to research and price flood risk left insurers reluctant to offer recently commissioned by Swiss Re. Across the lower coverage. Every time it rains, we are reminded of the consequences of inadequate data and undercapitalization. An average year’s worth of storms can produce uninsured flood losses of $10bn, compared to insured losses of $5bn, according to the The research pegs the market Swiss Re Institute. opportunity [in the US] at nearly But that’s all changing. Flood modeling has $38bn...with those kinds of improved exponentially, allowing insurers to offer enhanced protection to their customers with numbers and reliable modeling, confidence. Underwriters are no longer limited by it’s time to get in the game historical experience and rating tables. It’s now possible to rate individual risks thanks to the existence of high-resolution data, which means an

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insurer can offer flood coverage on the same dwelling that’s covered by a homeowners policy. Premiums insurers These advances have led to the emergence of flood insurance in the private market – a win for consumers could stand to make… – and more confident risk assessment – a win for Northeast/Mid-Atlantic: insurers. $437mn opportunity in Connecticut $401mn opportunity in Maryland Reconsidering the Flood Threat Flooding used to be considered someone else’s Southeast: problem. Television reports showed people paddling $559mn opportunity in Georgia boats down their streets past barely visible rooftops, $372mn opportunity in Tennessee and it all felt distant and remote. But that’s no longer the case; flooding is everyone’s problem. Midwest: The issue is often manmade, and it’s exacerbated $670mn opportunity in Illinois by natural forces such as more frequent volatile $584mn opportunity in Ohio $493mn opportunity in Michigan

Northwest: Every time it rains, we are reminded of $252mn opportunity in Oregon the consequences of inadequate data $388mn opportunity in Washington

and undercapitalization Source: Swiss Re research

Better Data, Higher Confidence weather. Consider the massive mixed-use Insurers are getting in the flood business because developments, which are no longer common only in they know their customers better than ever. They’re urban areas but in suburbs and smaller communities. constantly receiving information on those customers With all that concrete, where does the water go when – data that can be unlocked for growth. Using that it rains? Couple that with atmospheric rivers that data wisely, they’re providing coverage that people produce torrential rain and storm surge, and very desperately need at a fair price and making it easy little of the United States is spared from flooding for consumers. It’s a recipe for greater profitability these days, as the cost grows and vulnerability and increased loyalty. increases. Consumers are noticing, too. Insurers are Most natural catastrophe risks remain seeing brisk take-up rates on flood-eligible new uninsured, contributing to a large protection business as customers become aware of their gap. This leaves households, businesses, and susceptibility to flood damage; and because the economies vulnerable to potentially catastrophic price more accurately reflects the risk, they’re losses. As long as the effects of climate change now making the smart decision to purchase the continue, there will be demand for flood coverage. Matt Junge, head coverage. of property When disaster strikes, insurance is a first responder. solutions for US Opportunity Everywhere and Canada at Flood has been an exception, until now. Reliable Another way to define the flood insurance gap is to Swiss Re modeling, accurate pricing and fresh capital create consider that only one in six homes in the United a compelling case for profitable growth. The path is States has flood insurance. Many people think they now cleared for (re)insurance to facilitate the building don’t need it. Others assume their homeowners of resilient communities. policy covers it. Still others believe they can’t afford it. Where reliable risk assessment and potential Fact file healthy return goes, capital will follow. Carriers in just c 85 percent of American homeowners DO NOT have about every region of the country are recognizing this a flood policy significant commercial opportunity and have begun c Average yearly protection gap – $10bn offering flood coverage to their customers. In addition c Average insured losses – $5bn to the states mentioned above, the risk is real in c Only one in six homes in the US has flood virtually every region, as evidenced by the market gap insurance in many regions (see box-out top right). www.theinsurer.com #REinsuranceMonth | Week 5 22 | Video

Streaming now on The ReInsurer TV! It’s been another week of interviews with industry leaders at The ReInsurer as we tap into the important topics and events that are shaping the market in the run up to the 1.1 renewals his week we caught up with Beach’s TJeff Turner who said Canadian insurers can expect to face a “rational” reinsurance renewal heading into 2021. Turner, who is senior actuary and managing director of reinsurance broker Beach’s Canada office, noted Jeff Turner: “We don’t have the same issues, and we really do have plenty of reinsurance capital in Canada…There is a balance there and we think it is going that low interest rates will put a focus to be a rational market at renewal this year.” on underwriting profitability, while the attractiveness of potential reinsurance returns elsewhere may impact the amount of capital at play in the Canadian market. Canadian insurers should be assessed on their own merits as the country has not been impacted to the same degree by some of the recent industry trends, he said. Also speaking to this publication, Ed Broking’s chairman of non-marine reinsurance Ian Wicks urged brokers to embrace technology in order to take cost out of the system. He pointed to the use of electronic Ian Wicks: “There’s a lot of discussion over the remuneration of brokers trading platforms as “essential tools” and that’s battling against a continual backdrop of people looking to disintermediate the business.” that not only strip out inefficiencies but also enable business to be done faster. Wicks added that brokers will increasingly rely on data and technology as the focus turns to being a “holistic” strategic advisor. Keeping with the technology theme, Igor Best-Devereux, the founder and CEO of eReinsure, says the writing is on the wall for those companies that do not embrace technology. For those that adopt technology, the dividends can be huge but those who fail to keep up may be left behind, he said. “There will inevitably be winners and losers, particularly losers who are not Steve Bowen: “We’re at 13 consecutive years now where SCS losses in the US tech-savvy. The writing is on the wall as alone have surpassed $10bn, and in fact this year we’re running just behind 2011 in terms of the overall aggregate cost for the year.” far as this is concerned,” he said.

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Aon’s head of catastrophe insight Steve Bowen warned that annual double- digit billion-dollar losses from the US severe convective storm (SCS) are now a “new normal” for the industry. Wildfires, floods and droughts are all causing larger losses than in the past, but Bowen said SCS is the most notable example of a secondary peril taking a heightened toll on the industry. Bowen said the frequency of such events is not on the rise but the severity of each event is increasing. Beach president Clark Hontz said rated reinsurers have an opportunity the likes Nicola Parton: “We don’t see any signs or any evidence that the trends around social inflation are improving.” of which has not been seen in years as clients turn away from the collateralized market over trapped capital and commutation concerns. Hontz explained that he has not seen clients “flock” to rated reinsurers. Elsewhere, Hontz said there has been an increase in interest for industry loss warranties (ILWs), with more reinsurers purchasing the specialist protection this year. Meanwhile, Volante Global’s Talbir Bains opined that improving conditions combined with the challenges born out of the Covid-19 pandemic have created significant opportunity for underwriters. He warned that a long-term view and Talbir Bains: “The opportunities are multiple but the key is discipline. What we a renewed focus on discipline will be have to do as a market is look at the long-term viability of those opportunities and not the short-term gain.” required if those opportunities are to yield positive results. “The opportunities are multiple but the key is discipline,” he explained. “What we have to do as a market is look at the long-term viability of those opportunities and not the short-term gain.” We also spoke with Swiss Re’s Nicola Parton who highlighted that any positive changes in social inflation trends driven by the pandemic were only “temporary” and that a sustained period of rate increases is required if prices are to compensate for loss trends. “We don’t see any signs or any evidence that the trends around social Igor Best-Devereux: “There will inevitably be winners and losers, particularly inflation are improving,” she said. losers who are not tech-savvy. The writing is on the wall as far as this is concerned.” www.theinsurer.com Week 5 | #REinsuranceMonth 24 | Comment

Are we in for another record-breaking year? 020 has already proven to be “hyper-active”. Arthur In the midst of the 2020 Atlantic hurricane 2and Bertha formed before the official Atlantic season, Pete Dailey, vice president at hurricane season kicked off on 1 June, 2020 and by RMS compares and contrasts 2005, 15 September, 2020, roughly the season’s midpoint, perhaps the most memorable Atlantic 21 tropical cyclones have developed, 20 of them named, nearly double the average for an entire season in recorded history, to 2020 season of about eleven. Every named storm this year has been born— what meteorologists refer to as its “genesis”—prior to its 2005 counterpart. Tropical Storm Vicky formed Pete Dailey, vice president nearly three weeks prior to Hurricane Vince that at RMS formed on 5 October, 2005.

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What matters most: wind damage potential Storm frequency matters, but storm intensity matters more. At the end of this year we’ll need to consider both the number of storms and their intensities to measure 2020 against 2005. The Accumulated Cyclone Energy (ACE) index provides an integrated metric, combining frequency and intensity as a proxy for the total wind energy generated by storms over the course of an entire season. ACE approximates the wind energy of each tropical system for every six hours of its life cycle. Seasonal ACE is the sum of ACE for each individual storm—a useful metric for risk managers, accounting for the number, intensity, and duration of storms. The chart below shows the development of ACE over Consider intensity the 2005 season, and a seasonal value of about 250— The second half of the season has yet to play out, 2.5x the average seasonal ACE of 105. The large jumps but if conditions persist, the 2005 record of 28 named in 2005 corresponds to the intensifying individual storms in a single season could be broken this year, storms like Katrina, Rita, and Wilma. But even weaker though storms are only relevant to the insurance storms contributed to ACE in 2005. industry if they develop damaging winds and make an As of September 15, 2005, the ACE index had impact on insured exposure. reached a value of 145, which is 138% of the wind Overlaying storm intensity onto energy expected in an entire the same chart (graphic 2), again season. for 2005 and 2020, shows that only So far this year, the ACE index seven of the 21 tropical cyclones at Storm frequency matters, but value is at 64, roughly equal the season midpoint (Hanna, Isaias, storm intensity matters more to the long-term average (as Laura, Marco, Nana, Paulette, and indicated by the solid black Sally) reached hurricane strength. line). The key difference—despite Four only achieved short-lived the rapid pace of genesis in CAT1 status—though Laura made landfall as a CAT4 2020—many tropical cyclones this season have been hurricane and produced widespread loss owing to weak and short-lived, which detracts from the total both wind and flooding along the Gulf Coast. CAT1 hurricanes can be destructive, but pale in comparison to the disaster potential of a major hurricane (CAT3 and above). By this point in the 2005 season, nine cyclones had reached hurricane strength, four were major hurricanes. Dennis reached CAT4 status; Emily reached rare CAT5 status with winds exceeding 160 miles per hour! Hurricane Dennis set the record for the strongest hurricane to form before August, a record broken just a week later by Emily. At this point in mid-September, nobody could have predicted what was in store for the remainder of 2005 culminating in a record number of named storms, number of storms prior to August, number of ACE value. hurricanes, major hurricanes, CAT5 hurricanes, and In contrast at this point in 2005, three fewer tropical number of days with an active storm in the basin. cyclones had developed, but they strengthened and That remarkable season included Hurricane Katrina, persisted, leading to an ACE value over double that of the most devastating hurricane landfall on record, 2020. which itself broke a number of additional records that ACE is a useful metric because it applies directly year. to damage potential as it accumulates each storm’s maximum winds over time. But there’s still an element of damage potential missing in ACE, namely the size of www.theinsurer.com Week 5 | #REinsuranceMonth 26 | Comment

the wind footprint. As of 15 September this year, the TIKE value has To take storm size into account, the TIKE index was reached 3.6, slightly less than the long-term average developed. TIKE stands for Total Integrated Kinetic of 3.8. At this point in September, many seasons Energy and is similar to ACE, but incorporates the over the last 18 years have recorded higher TIKE wind radius of values, such each storm. It as 2005 which accumulates the had already total area over reached a value which damaging of 6.5—70 percent wind energy is higher than produced for the the long-term entirety of each average and the storm’s life cycle TIKE value this and then summed season. So, from up for the entirety the perspective of each storm of integrated season. wind damage TIKE provides us potential, 2005 with a useful metric eclipses the to compare overall integrated wind damage potential energy so far this from one season to the next. year and almost every year since 2002. The exceptions Because accurate and dependable measurements are 2004, another active season with many strong of storm radii have only been long-lasting hurricanes, and 2008, available for the past couple of when by 15 September, TIKE had decades, we have a more limited spiked due to long-lasting and historical record of TIKE. We’ll have to wait until later this strong hurricanes like Bertha and We’ve calculated TIKE over the year to assess the financial Ike. past 18 seasons, with the results shown in the chart below. impacts of the 2020 season Conclusion Note, the average seasonal TIKE When we look back at the 2020 value over this period is about hurricane season a few months 8.0 (8,000 terajoules), and the average value as of from now, we will question whether reasonable September 15 is about 3.8 (3,800 terajoules). comparisons to 2005 can be made. On its face, 2020 At this point in a typical season — nearing the appears to be off to an unprecedented start with peak, TIKE has every named storm accumulated about in 2020 developed half of its season prior to its 2005 total. counterpart. Dig a bit By the end of 2005, deeper and consider TIKE had reached a metrics important to value of 13.0, second quantifying damage only to the 2012 and loss—namely season in which storm intensity, Hurricane Sandy’s duration, and size— size, strength, and we quickly realize duration spiked that the level of wind the TIKE value late energy and potential in that season. In damage generated 2005, not only was in 2005 sets a very the wind damage high bar that will be potential extremely difficult to surpass. high, but much of We’ll have to wait that potential was realized in the form of landfalling until later this year to assess the financial impacts of hurricanes producing devastating damage in the the 2020 season overall and make comparisons to past Caribbean and US. seasons like 2005.

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Investment for a sustainable future The ReInsurer caught up with Hannah Simons and Beat Holliger from Schroders on the group’s commitment to ESG investing and why ILS is well suited to this approach

n November last year, Schroders made an important considering the sustainability risks and opportunities Icommitment. The group publicly announced that it would within their investment processes, including ILS. be integrating environment, social and corporate governance Simons added that as the firm nears completion of its (ESG) across all of its investments by 2020. integration goal it is looking beyond this to understand Driven in part by a growing and encouraging interest the impact of its investments. She said we want to make by clients, the move was also motivated by what Hannah sure our investors and clients understand the impact Simons, who is part of the sustainable investment team their investments have on society. at Schroders, described as “an internal aspiration” within Investors are increasingly considering the ESG the company and last year’s announcement was part of properties of their portfolios, said Simons, with Beat the group’s ESG journey which has evolved over time. Holliger, head of product management, at Schroder Schroders’ Sustainability Accreditation spans Secquaero, adding that ILS can be aligned with positive ‘Screened’, ‘Integrated’, ‘Sustainable’ and ‘Impact’ ESG attributes which could help improve protection categories, and it helps Schroders’ clients distinguish against both short-term and long-term risks associated how ESG factors are considered across its products. with climate change, as one example. And the asset management business is sticking to Often asked about the ESG attributes of this its word. By the end of August this year, 95 percent of unique asset class and how these translate into Schroders’ assets were ESG integrated. responsible investment policies, Holliger said Speaking to The ReInsurer, she said: “Whilst for ESG considerations are important to the long-term some, sustainability is relatively new, it is very fast performance of any investment. paced. The landscape has shifted considerably as clients “We believe the ILS asset class is naturally aligned with ask more questions, seek to express their sustainability ESG principles and that a continued commitment to high preferences and add to this growing interest from ESG investment standards will not only accelerate ILS regulators, we will continue to see our approach to market growth, but should also ensure the long-term sustainability and products evolve over time.” sustainability and attractiveness of the asset class Simons added: “Our integration commitment for investors going forward,” he said. was a really important statement reinforcing the “Delivering attractive financial returns to investors importance of sustainability and ensuring that every with sustainable investments is one of the key single investment process here at Schroders to this targets of the Schroders Group,” he added. “In order approach.” to be a responsible investment manager, we however, Hannah To do this, Simons explained that all investment Simons and look beyond the financial factors as we believe there teams and professionals will have a systematic way of Beat Holliger are other non-financial factors which drive the quality www.theinsurer.com Week 5 | #REinsuranceMonth 28 | Interview

of assets.” Specifically looking at the role of ILS ESG, identity of the ultimate policyholder who receives the Holliger said the framework aims to implement a “true compensation payments under its insurance policy in sustainability strategy for the future and thus avoids the event of a payout. Information on policyholders is undesired ‘greenwashing’ effects where ESG deteriorates subject to data protection laws. For life risk, which is to a simple marketing strategy without impact.” an area that Schroder Secquaero is one of the market Schroder Secquaero’s ILS ESG framework focuses on leaders, emphasis is placed upon understanding how key non-financial issues which Schroders believes can policies are distributed to ensure compliance with positively impact the asset class. These issues revolve distribution and consumer protection regulations and around: to avoid misaligned incentive structures and mis- c Fund structure: Ensuring it is set up in a jurisdiction selling risk. It would, however, be beneficial to receive with robust institutional and regulatory capacity and information on the occupancy or industry sector of that a third-party audit is conducted policyholder, especially for commercial insurance. A c Special purpose vehicle (SPV): Ensuring a strong sector classification of ultimate beneficiaries would regulatory environment in which the SPV is set up, allow addressing restrictions of certain sectors within including third-party audit and quality of board of investment guidelines of our clients. directors c Transaction sponsor: Knowing transaction sponsors Findings through structured KYC processes and understanding (Re)insurance addresses already many aspects of ESG. the motivation for sponsoring the transaction The challenge for fund managers is to come up with a c Covered risks: Considering the ethical and impact framework that demonstrates to stakeholders that the aspects of the risks we sell protection for business takes ESG seriously, thus avoiding potential criticism of ‘greenwashing’ the ESG disclosures the group Understanding ESG risks in makes, but not performing accordingly. “Our aim is to ILS investment activities become a thought leader for ESG in ILS by pushing the Environmental - Most of non-life ILS covers risks market towards increased transparency and improved related to natural catastrophes and are, as such, closely disclosure,” said Holliger. “This would allow us (and the linked to the environmental aspect of ESG. Costs of market) to make better-informed decisions that will such catastrophes have increased over time due to ultimately result in more sustainable, ESG-compliant population and exposure growth (especially in coastal investments. “ILS can contribute to this objective by areas that are vulnerable to weather events) or aspects being integrated into the overall ESG framework as a first of climate change. ILS have shorter maturities and step, but can further develop over time towards impact price adjustments take place more regularly. Frequently investing,” he concluded. updated models reflect the latest scientific research, eg, new findings about tectonic fault lines or changes in weather patterns and their impact on the frequency/ Climate change and resilience severity of events and ultimately, climate change. One of the drivers of increasing losses from natural hazards we Social - (Re)insurance and the pooling of risk believe is climate change resulting in the intensification and undoubtedly has social benefits. The global insurance frequency of weather events in certain areas, eg, severe connective markets help to diversify risks away from local markets storms and wildfires because of severe drought. Earthquakes or and therefore relieve economies in case of a major event. volcanic eruptions are not affected by climate change. ILS can also address the protection gap by developing However, the main drivers of losses are the growing population products for low-income markets where conventional globally, improved standard of living, increasing exposures risk transfer products are not available or not affordable. (industrialization, urbanization and concentration) in locations In some cases, public entities and supra-governmental vulnerable to nat cat events, and the increased complexity of organizations have stepped in to sponsor transactions value chains (eg, business interruption). Climate change is a that will help ease the impact of large losses on long-term phenomenon and a gradual process whereas insurance economies and societies. products in general and ILS specifically are of shorter duration Governance - The goal towards sustainable (one to five years) and reprice regularly. This means that it is not investments also includes due diligence on the sponsor as problematic as first assumed as the insurance industry can of an ILS transaction, the structure of the transaction and adapt accordingly. Existing insurance models need to be adjusted on who its beneficiaries are. regularily to reflect both exposure/vulnerability growth and Governance checks take into consideration aspects climate change. Poorly or previously un-modelled perils need to such as the domicile of the sponsor, sanctions against be incorporated into the assessment of risks. Insurance solutions the country of the domicile or corruption levels that will be key to help mitigating the effects of climate change and will might result in inappropriate handlings of loss payments. contribute to the overall resiliency of societies. Usually, the ILS manager would not know the

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The power of independence Ahead of RKH Reinsurance Broker’s imminent rebrand to Howden Reinsurance Brokers later this week, The ReInsurer caught up with Elliot Richardson, chairman of the intermediary to discuss the forthcoming 1.1 renewals, the Lloyd’s opportunity and the ability to be a challenger s the industry focuses on 1.1, Richardson highlighted turnaround as offering an opportunity for growth. Athat the forthcoming renewals are shaping up to be “We have a big bet on Lloyd’s, probably bigger than some of the most complex he has ever experienced, with any other broker proportionately,” he said Covid-19 uncertainty, challenges with at-home working “Before the recent merger between Marsh and JLT and the myriad of market capital raises all serving as we were the largest insurance provider of premium “distractions” that will place a “huge burden” on renewal into Lloyd’s, which is something that most people dates. didn’t realise, $3.5bn of premium into the market is Of particular concern is the question of a “delta” we believe our support in the long-term future of between rates in the direct and reinsurance Lloyd’s.” markets, he said, adding that the industry is too The addition of MGA Dual, one of the largest reliant on anecdotal evidence concerning market international MGA platforms, combined with the movements. data and analytics offering provided through “There’s going to be the issue to balance up the Hyperion X means that the intermediary is well direct market versus the reinsurance market and positioned to move quickly into growth areas and is seeing if there’s a continual delta between what’s ready to raise and deploy capital. happening in both,” Richardson explained. “We’re able to spot trends rather “We’ve worked in this industry long than fads in terms of market movement enough where people are talking about We have a big bet on Lloyd’s, profitability, blocks of business that we rates are up by X, rates are down by could probably trade better with our Y; that needs to change. We’re still far probably bigger than any markets,” he said. too anecdotal as a business and as an other broker proportionately Richardson added: “We will keep industry. building in London as it is going to be He added: “We should be brave enough very much our centre of what we continue as an industry to talk about what we to invest in in the reinsurance world.” do think it is, not just brokers trying to protect their client’s position or people trying to talk up the market For the next generation more.” With broker consolidation firmly back on the agenda Richardson said Hyperion Group – through its data in 2020 following Aon’s landmark deal for Willis Towers and analytics arm Hyperion X – has an ambition to Watson, Richardson said the group remains focused on tackle this issue through the launch of a real-time rate attracting best in class talent and bringing in people guide for the industry that will be updated on a weekly who want to be aligned with Hyperion’s core value of rather than a look back basis. independence. “It’s good for the industry to be talking about “Independence is, at scale, the ability to be a real-time rates, it doesn’t just have to be a Hyperion challenger, we’re going to do things properly. Clearly initiative. We hope it will gain momentum and add reinsurance is going to be a huge opportunity with the more data points,” he said. inevitable need for choice when you’re throwing the top four together and making them two.” Lloyd’s play He added: “Hyperion I describe a little bit like a With Hyperion-owned RKH set to be renamed Howden famous watch brand’s strapline, we’re looking after Reinsurance Brokers from 1 October, Richardson this for the next generation, we don’t own it. And that was bullish on the group’s future outlook, pointing right to remain independent is something that we to its “big bet on Lloyd’s” and the market’s ongoing remind ourselves of every day.

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