Reinsurance broker TigerRisk Partners has formed what it is calling a cat capacity SWAT team, dedicated to identifying new sources of property-catastrophe capacity, as a potential capacity crunch looms for cedants ahead of next year’s cat renewals, many of which are themselves seeking more coverage as property exposures soar.

Rob Bredahl, chief executive of TigerRisk Partners, which is in the midst of merging with Howden following the $1.6 billion deal unveiled in June, says that cedants seeking large amounts of property-catastrophe capacity should be under no illusions as to how tough this renewal could be.

“I have seen some brokers playing down how difficult the market is going to be,” Bredahl said. “We think it could be extremely difficult and we, and our clients, are preparing for a very tough market. If we are wrong, it would be a great relief, but it’s better to prepare.

“So, we are preparing, we are advising our clients to prepare and we are putting in place backup plans if the renewal doesn’t go as we hope it will go. Clients are concerned about availability of capacity for the first time in decades. They’re pausing on adding more catastrophe exposure to their balance sheets because of the potential lack of reinsurance.”

Central to its strategy to find solutions is Tiger’s so-called SWAT (special weapons and tactics) team. The logic is sound: in the context of hardening rates, now is a very good time to invest in property-cat business. The challenge is simply explaining the opportunity to investors in a way that cuts through the wider noise of macroeconomic challenges including inflation and rising interest rates—and to get deals done in time for the year-end.

Led by Jarad Madea, chief executive officer of TigerRisk Capital Markets & Advisory, the unit contains experts from across the business, including traditional brokers, insurance-linked securities (ILS) experts and analytics specialists. Its job is to approach investors from many different specialities and educate them about market conditions now, and the resultant opportunity.

“We are systematically approaching investors that have either invested or shown interest in property-cat business before and we’re presenting them with a menu of ways they can enter the market,” Bredahl said.

“We’re showing them all sorts of live opportunities: traditional placements, sidecars, ILS fund investments, cat bonds, and how they can invest through Lloyd’s. And we’re showing them the pros and cons of each option.

“We’re reaching out to insurance companies: regional insurers, mutuals, and life companies, if they have written cat in the past or maybe we believe they have some interest in doing so. Finally, we are going to the traditional markets. We need to understand exactly what their appetite looks like and where they might have more capacity available.

“It is a big job but it needs to be done to best serve our clients. When we sit down with our clients and they say: ‘what are you doing to help us?’—there’s the answer. We are scouring the planet for cat capacity for the benefit of our clients.”

Capacity has dropped

Bredahl explains that the capacity crunch playing out in the cat space is being driven by a number of different factors. For reinsurers, it is, in theory a good market. He believes levels are reaching those in the market in 2006, a very hard market, on the back of four consecutive years of rate increases.

“Yet for the first time in maybe 14 years, available reinsurance capacity has dropped. There is a supply-demand imbalance,” he said.

This is being driven by a number of factors. One of the biggest is the large mark-to-market loss reinsurers have absorbed on their investment portfolios because of spiking interest rates and falling equity markets. That has meant a very big hit to their balance sheets.

“For the first time since the introduction of the ILS market, we saw net redemptions this past year. For 25 years, alternative cat capacity has grown, and now it’s flat to down a bit. Another factor in reduced capacity is that some reinsurers are increasing their focus on casualty business at the expense of property-cat,” Bredahl explained.

He cites another factor. Because so many reinsurers now are part of composite companies with an often larger primary business, in some cases companies are seeing more opportunity on the primary side and are diverting their capital away from reinsurance to the primary side.

“All that has brought a meaningful shift; it’s a meaningful drop in supply,” Bredahl said. “And then on the flipside, demand is up due to the challenge of inflation and the uncertainty of climate change. Plus, reinsurers are moving away from volatility. They believe if they squeeze out volatility their valuation will increase.”

He believes the withdrawal of capacity from the market is a big problem and could also represent a longer-term trend. “The market should be concerned about the direction following the exit of various players from property-cat risk.

“Reinsurance is supposed to be a shock-absorber to take volatility away from the insurance carriers. Yet many reinsurers which are publicly-traded or part of larger enterprises don’t like the volatility any more. Their number one mission should be helping cedents manage volatility, and they’re staying away from it—that’s a problem for their value proposition.”

Because of this, Bredahl believes rates could continue to harden for the medium term—which makes it a good time to enter the space. “It is a good time for new capital to come in, but with a couple of caveats. Public markets, I believe, are undervaluing reinsurance balance sheets. Many reinsurers are trading somewhere below book value. That complicates the investment thesis for private equity firms.

“Another challenge is there is a lot of opportunity out there for investors, a lot of dislocated markets. So when you explain the rate increases, particularly in property-cat, investors say ‘yes, that’s pretty good, based on history, but wow, look at all of the other opportunities in front of me’.”

Education needed and climate risk

As well as the complex market conditions and inherent volatility there is another challenge Tiger’s SWAT team must overcome: the often lengthy education process required by many investors. This does vary, Bredahl admits, with investors previously familiar with the space more likely to get up to speed quickly. But for completely new investors it does take time.

Another hurdle that will always need to be jumped is the issue of climate change. Investors are concerned about its implications for property-cat risk and whether it is adequately accounted for in models and priced appropriately as a result.

“You can’t get away from climate change discussions,” he said. “For over a decade, there’s been somebody around every board table or investment committee who has raised climate change. Now we’re finally seeing the real manifestation of climate change, they are being proved correct. It’s a big issue.”

The other major issue that needs addressing by every cedant, he says, is inflation. “If they do not have a very good, deep, comprehensive explanation for what inflation means for them and how they’re dealing with it, on the rate setting side and on claims management, deals don’t get placed easily,” he said.

“Reinsurers want a lot of detail on both. There are many different ways to handle it and many ways to explain it, but they want to make sure that cedants have thought deeply about inflation and done the work.”

Bredahl is speaking amid the ongoing integration of TigerRisk with Howden, following the deal announced in June. He argues that the larger group is much better placed to handle the many challenges he has described, given its more comprehensive offering and the complementary expertise. Overall, he states, he has never before seen a better opportunity in the aftermath of two companies merging.

“The combination on the reinsurance side is amazingly complementary,” he said. “You really couldn’t build two organisations separately with the idea that they’ll merge at some point in the future and do a better job. The two sides fit together perfectly.

“It also means we are bigger. There are all kinds of economies of scale associated with that and we have much bigger product range to talk to our clients about as well as being able to offer better analytics. We have a lot more people and a lot more data now.

“We have gone from both sides having an incomplete global offering to being one of the big four brokers with a full offering. It’s hard to overplay how much of a great step forward this is for both organisations.”

Bredahl was in London the week before the Monte Carlo Rendez-Vous attending meetings between the senior team leaders at TigerRisk and Howden Re. He says that one of the standout takeaways from the week was again the similarity of the cultures of the two firms.

David Howden, chief executive officer of Howden, and Rod Fox, now executive chairman of TigerRisk use almost the same words to describe their firms, Bredahl said. “They both talk about teamwork, family, a holistic approach. It is scary.”

“I’ve been in the financial services business for 35 years, and I’ve never seen a better opportunity for a combined entity to serve clients in a better, more meaningful way. For a company to grow extremely rapidly through better service and a better offering for clients. I’m more optimistic about our short-term prospects than I have been anywhere I’ve worked.”