Sincerest form of flattery: Ariel Re has a model others want to copy

In addition to having an “industry legend” as its chairman, Ariel Re mainly underwrites in Bermuda directly to its Lloyd’s syndicate. This is what makes it unique among the newest players, according to chief executive officer Ryan Mather.

Mather was speaking to Bermuda:Re+ILS during the Bermuda Risk Summit in March, together with Ariel Re’s head of platform development, Tim Shreeve.

Ariel Re was founded in Bermuda at the end of 2005 and has had a few different owners since then. The last change was when it left Argo Group and was bought by Pelican Ventures and J.C. Flowers in November 2020. Its chairman is Jim Stanard, the co-founder of Pelican Ventures and previously chairman of TigerRisk and chief executive officer of RenaissanceRe.

With offices in Bermuda, Hong Kong and London, Ariel Re now carries risk exclusively via Lloyd’s in Syndicate 1910. Lloyd’s data shows Syndicate 1910 to be the second most profitable syndicate in the Lloyd’s market for the 10-year period to 2020.

“Where you start your life is a very strong determinant of how successful you will be,” Mather said, “especially if you have something meaningful and different to offer the market.”

“We have this twin model of Bermuda and London. We love Lloyd’s because Lloyd’s has been around for more than 300 years, and our Bermudian coverholder gives us the ability to write in Bermuda directly onto our Lloyd’s syndicate. That has until now been a unique model for reinsurance. Whether we invented that, I’m not quite sure, but other people are trying it now.”

Shreeve added: “We never get mentioned with the class of 2020, probably because the brand has been around for so long, but we’ve changed our business model since being bought from Argo.”

Lloyd’s has all the advantages of a very good and longstanding regulatory regime, while Bermuda gives Ariel Re proximity to its clients, who are mostly in the US. Bermuda is also attractive because brokerage fees are 5 percent lower for US catastrophe business than in London, which generates material savings.

Hot topics

Ariel Re focuses on writing five principal lines of business—property cat, marine & energy, clean energy, US professional lines, and cyber. More than half of its staff are based in Bermuda.

Attending the Summit in Hamilton was about “showcasing what we do”, Mather said. “We play our own game first, and we worry about the market afterwards, but the hot topics of the conference seem to have been cyber as a broad topic; Ukraine, although none of us knows how that will turn out; and property cat, which we are very involved with, and probably most specifically, Florida.”

Florida is a “fascinating” state, he added, with its population of 22 million that, despite “a tendency to get a lot of hurricanes”, keeps growing by 800 new residents every day.

“Here’s the deal: there’s no state income tax, so it’s an attractive place to go. But the big, established insurance companies don’t want to go there and put a lot of their capital at risk because the possibility of a massive loss in Florida is quite high.

“Since Hurricane Andrew in 1992, the ecosystem there has built up of lots of little companies with not very much capital. They’re very dependent on buying catastrophe reinsurance, but that model is under pressure because elevated claims activity of all types often driven by litigation has impacted on the carriers’ financial performance,” he explained.

“It’s currently very difficult to operate an insurance company in Florida, especially of a smaller size with not very much capital. Bermuda especially is currently trying to figure out how to sustain a model that works for the 22 million residents so they can buy insurance at an affordable rate. None of us knows how it’s going to be solved, quite frankly.”

The class of 1992/1993 that was established in response to Hurricane Andrew paved the way. “They were probably the first carriers to start building the relationship between Bermuda and Florida. I don’t think there’s any bigger source of capital than Bermuda in Florida today,” Mather said.

Systemic risk

Another industry legend, Convex chief executive Stephen Catlin, told delegates at the Summit to pay more attention to systemic risk. “That means the situations that can bite you from different directions” Mather said. “Ukraine, for instance, is one of those. The market will be finding out how it’s going to impact aviation, terrorism, marine war, war-on-land, and cyber as well as investments.

“We have to make sure that buckets of risks that we take are separate and distinct, and not prone to systemic risk. COVID-19 is another recent example—it was workers’ compensation, property, contingency, many lines of business. Trying to think outside the box of not just when a ship sinks, but what about when a pandemic, or a war, or a 9/11-style terrorist event happens—it’s impossible to predict but we have to get better at it,” he said.

Ariel Re has opted to use Portfolio Manager, the cyber risk analytics platform from CyberCube. This is a “scenario-based data-driven model” that enables risk professionals to develop insights for their senior leadership and teams.

“We have a relatively small portfolio of cyber reinsurance at the moment, but we do have ambitions to be much bigger,” Mather said.

“We have hired a new head of cyber underwriting, Daniel Carr, and we’re building a team around him so that we can design a better reinsurance product and better understand how to price that product. At the moment, reinsurance cyber products are based on quota share treaties and aggregate stop loss, which cover everything,” he said.

Referring to a lack of capacity in the cyber re/insurance market, Shreeve added: “If coverage is more defined, more segmented, more segregated, and maybe even cut back, then you can move faster to the point where what we’re talking about becomes viable, because it’s very clear that we’re going to be covering cyber on a reinsurance basis.

“In the past, if you’d have offered somebody an occurrence product covering one single thing within their cyber book, they’d probably have said no, because it doesn’t make sense. But now, capacity from a quota share treaty and aggregate stop loss is compressing, and deals are harder to place.”

Sustainable outlook

Climate risk on the other hand is something the reinsurance industry “has always faced”, Mather said. “I’m not going to pretend that climate change was invented in 2017, but between 2017 and 2021 we had an endless stream of catastrophe losses, which brought climate risk into pretty stark focus for us.

“From our perspective, it’s about quantification, trying to understand how risk is changing over time, how our models need to adapt to capture that risk, to make sure that we can stay ahead of the curve.

“Florida’s population has grown dramatically in the last two years. There’s climate change on top of that and now inflation is an issue too. We’re trying to navigate all of those things at the same time.”

On environmental, social, and corporate governance factors, Shreeve said: “Lloyd’s has been very strong on governance for a long time and there has been a trend there over the last three years, where social elements have been increasingly incorporated into business frameworks, through requirements such as diversity and inclusion policies and evidenced by fines for bad practice.”

Ariel Re has also been working on the formation of a managing agency in London. “The cultural elements in the managing agency, and how the company thinks about that are at the forefront of the application,” said Mather.

“It’s very much a discussion rather than a checkbox exercise. We’ve had to comply with the requirements that are going to be rolled out this year, in terms of board representation. We’ve been able to do that out of the gate as well as on our management team, so I think we’re ahead of the curve thanks to the timing of setting up the business.

“It’s a feature at Lloyd’s now, although it’s not quite as visible in Bermuda at the present time.”

Another advantage of Ariel Re’s link to Lloyd’s is that Solvency II is embedded there. That causes fewer problems with credit ratings, the executives said. Shreeve referred to discussion at the Summit about changes expected from S&P Global Ratings to be more aligned with the Solvency II requirements.

“It doesn’t make a difference for us because we’re already capitalised in London, under Solvency II, and Lloyd’s has an S&P rating,” he said.

An issue that affects Ariel Re in Bermuda, along with all international companies, is taxation, Mather said.

“We’re obviously very interested in what’s happening in Bermuda as it will affect the running of our business. One example of that is healthcare—last year our healthcare costs increased materially.

“Everything is imported which is expensive and we are currently thinking about inflation, not only in the cost of goods but also in transportation. It is definitely something for us to keep an eye on.”