“We want that innovation to happen in Bermuda.”
Brad Adderley

Adderley: Rated balance sheets will come. The second issue is secondary trading. I think some of the new electronic platforms being built will hopefully make it easier and quicker to trade in the secondary market. But we want that innovation to happen in Bermuda, and we hope the BMA will regulate it properly.

Cat bonds came to Bermuda 10 years ago, then sidecars and then the collateralised market. Now insurtech and electronic platforms have arrived, and all these things have arrived in Bermuda—not other offshore jurisdictions.

We should continue to help the BMA to ensure that future products are developed here, because Bermuda has the opportunity to really grow.

Redcliffe: A lot of the innovation we’re seeing is on the traditional reinsurance side. But on the ILS side, the biggest thing we need to get a handle on is how to manage that tail. There is no easy answer—perhaps looking at secondary trading or engaging with run-off carriers to see whether there is interest in having the run-off carrier reinsure the tail.

Because that is their core competence they certainly could have a role to play—the question, of course, is price. We’ve talked about the rated carrier and I think that also handles this issue quite nicely.

Mills: Transparency is a key message we’re receiving from the market, particularly when it comes to losses and how these are being reserved and reported. This issue has been highlighted by the fact that property hasn’t proved to be as short tail as expected following some of the adverse developments on recent losses over the past few years.

“Different managers have different issues.”
Andrew Hughes

Hughes: I would love to say that we’ve tripled our assets under management on the basis of a flight to quality, but we’ve had a mixed bag with some investors taking money off the table and others putting more in.

Maybe that’s part of the flight to quality. Different managers have different issues around performance valuations.

Bardon: On the deployment side, I think there’s a flight to quality. Investors and funds are more focused on well-behaving and trustworthy counterparties and cedants. There has been some poor behaviour, and the coverage and contract terms need to be clearer in some cases.

Some cedants and counterparties have not done appropriate or timely reserving or valuations. From my perspective, the flight to quality is about finding the right partners based on trust, as opposed to targeting certain returns.

“Coverage and contract terms need to be clearer in some cases.”
Rachel Bardon

Manning: The term ‘flight to quality’ is often used to refer to the fact that some players have a long record in the industry and therefore have built a brand. I believe that in a time of general scepticism around manager performance, people may well migrate to better established brands.

Bardon: We are also quite focused when it comes to transparency in the modelling. We have extensive documentation on the modelling before it gets approved or goes onto our books.

Our monthly valuations have detailed reviews in which we look at what is on risk, off risk, trapped or trying to return the funds. That level of communication with investors has been helpful.

“We provide much more information in a more timely manner.”
Erik Manning

Manning: I feel that Peak Capital is part of the new wave of ILS managers. The amount of transparency/disclosure that we give is very granular.

We provide much more information in a more timely manner than has traditionally been typical in the industry.

For example, we have an external validation process which is something that five years ago our industry tended to shy away from.

When investors want to look into our book of business, we want them to understand how we do what we do, why we do what we do. Historically, I don’t think that this level of disclosure was necessary or desirable.

If we’re talking about flight to quality, transparency of disclosure and transparency of information are what constitute quality for a lot of investors.

“Does the pricing really reflect that increased risk?”
Craig Redcliffe

Redcliffe: There is no doubt the level of due diligence that’s being undertaken is much more extensive—from the length of time and the number of questions that are being asked to the level of detail required.

Climate change is a big issue. How do models incorporate that and does the pricing really reflect that increased risk?

As a result, due diligence is taking longer. I would agree that pension funds generally want an established track record. It’s harder to get an initial allocation, for example, if you are a brand-new fund. But once you do get an allocation those are the types of investors you want for the long term.

They understand the risk, they understand how it interacts with the overall portfolio—especially in terms of non-correlated returns with the rest of their portfolio.

In the early years, many ILS investors were short-term, hedge funds, etc, and although they have a place in the market, it’s harder to build a long-term portfolio with short-term capital.

“There is no reason why that market cannot move to Bermuda.”
Tom Libassi

Adderley: Regarding flight to quality, if you look at existing carriers in the marketplace over the last five months, a lot of them have been quite successful in raising capital. We’ve seen some large capital raisings—and that’s interesting.

By contrast, most of the startups this year have been brand new commercial reinsurers with brand-new management teams, and they are raising between $500 million and $900 million. That’s actually quite low compared with previous startups.

So it looks as if investors are more willing to give capital to an established player in the traditional space than a startup.

Libassi: The amount of diligence being done now is equivalent to the amount of diligence that investors have done in other private market asset classes for decades. The fact that they just woke up to it in the ILS space is a positive.

The big change is that investors are now putting 1 percent into a retro fund, not really caring if they lose their money—they see it as a long-term allocation to non-correlated diversifying strategies. It is growing up as an asset class, so we have to be prepared to have the same level of transparency that investors have always had in other asset classes. That is a big shift.

The failure of people to do startups, both on the fund side as well as in the new company side, is also a reflection of the market growing up. This is not about exposure; it is about how you are different and how you provide value.

That’s a real opportunity for all of us to potentially have the biggest market and compete with Lloyd’s, which is ripe for picking right now.

You can charge the same amount and make 10 to 15 points more. And there is no reason why that market cannot move to Bermuda. It’s just a matter of solving some of the tail-risk issues.

Lloyd’s is the same as the ILS market, it’s just been around for more than 300 years. It’s the oldest hedge fund in the world, although no-one ever thinks of it that way.

Those are massive opportunities for the ILS space in Bermuda, and investors are thinking about the world differently. We are all concerned about how we are being treated by counterparties.

Not everybody has treated funds the same way. That applies to classic reinsurance companies as well: not everyone has treated people the same way, and I think there is a flight to quality on that side.

“Peak Capital is very much focused on Asia.”
Erik Manning

Manning: We are at that critical juncture, where many investors are beginning to reassess what they do in the ILS space and how they do it. I see an opportunity for all of us to innovate and grow the ILS industry in Bermuda.

We’ve talked about the operational side of things, but we also need a sea-change in how we manage these businesses and how we think about our responsibilities to our investors—relative to the counterparties and relative to our trades.

A lot of different components of the business need to be innovated in order to make the overall proposition more interesting. Obviously, because of our parent company, Peak Capital is very much focused on Asia and its ILS opportunities.

When you start getting into these different types of risks and different types of operational structures, you’re now talking about funds that are structurally different from what they used to be. The old 12-month, closed cat-only structure is gradually disappearing.

When I look across the performance of peers in our industry, the reason that cat bonds have performed well it because it is the only piece of our industry that is in fact ‘debt-like’. We all sell debt instruments in one form or another.

You can look at it any way you like, but investors who invest in ILS managers are typically debt investors, historically speaking.

Perhaps the time has come for the ILS industry to start thinking about how it bifurcates. A lot of risk is going to be much less subject to trapped capital, much less subject to losses, much more applicable to a debt such as execution format.

The rest of the industry maybe needs to start inventing new ways of approaching the problem.

“Investors are asking a lot of very important questions.”
Greg Wojciechowski

Wojciechowski: I wonder if this flight to quality discussion doesn’t refer to a confluence of different things which are making investors more aware. When the cat bonds asset class began to get traction post the global financial crisis in Bermuda, were investors opportunistic? Did they see this non-correlated asset as something that was yield-driven and unique?

They did, and that was the fuel that kicked off the renewed interest in these structures. As an exchange infrastructure provider, I look at ILS as an asset class moving through its life cycle: it is starting to mature and act in a similar way to other more unique asset classes.

Investors are asking a lot of very important questions about the mechanics of the asset class—and that’s good for the industry. As they get more comfortable, understanding results in longevity and fuels interest in the asset class.

The other thing that is fascinating and exciting to me as an exchange operator and infrastructure provider, is the discussion calling attention to the importance of transparency. When the BSX began its support of the asset class, there was a lot of hesitancy around the structure and certain aspects of the deals coming to market, but that’s not the case any more.

Structures seem more commoditised and issues confronting the asset class are more openly and collaboratively discussed among industry participants. That’s a really positive development.

The next step is a migration to regulated markets, which will give more confidence to the marketplace and make the secondary market more enticing. That could drive more business from a secondary market perspective as liquidity underscores a pathway to exit—if needed.

Image courtesy of Shutterstock / Tobie Oosthuizen