05 December 2018
Life re/insurance business from the US and Europe is being increasingly consolidated in Bermuda. In part one of this Insurance Asset Risk / Aviva Investors roundtable, participants explain the drivers behind that growth, what makes Bermuda an attractive jurisdiction and the sources of capital for the sector
Amy Ponnampalam, CEO, Athora Life Re
Chip Gillis, CEO, Athene Life Re Ltd
Sylvia Oliveira, CEO, Wilton Re Bermuda
Josh Braverman, chief investment officer, Somerset Re
Raymond Brooks, CEO, GreyCastle Holdings
Thomas Olunloyo, CEO, Legal & General Reinsurance
Paolo Fiandesio, senior manager, EY Bermuda
Gareth Mee, global investment advisory leader, EY
Alex Wharton, head of insurance relationships, Aviva Investors
Iain Forrester, head of insurance investment strategy, Aviva Investors
Christopher Cundy, editor, InsuranceERM
What are the drivers for consolidation?
Sylvia Oliveira: The main driver of consolidation in the US life insurance industry is the low interest rate environment. Companies are shedding old legacy closed blocks so that they can focus the freed up capital on their core lines of business. Most of the legacy business was written when interest rates were above 6%, so the blocks are now unprofitable in the current interest rate environment. In the UK/EU, the new regulatory regime is one of the main drivers of consolidation. Companies have had to make material strategic shifts to remain competitive under the new regime.
Josh Braverman: The gap in return-on-equity for a lot of the legacy lines business, particularly in the high-guarantee life and savings space for publicly traded companies in the US, makes it optimal for them to look to divest.
Bermuda, to the extent you can create a platform that has advantages based on economic risk-based capital requirements or advantages from a tax perspective, makes it an ideal home for a lot of those types of business.
Thomas Olunloyo: From a European perspective, it is important not to underestimate the impact of Solvency II. European insurers are faced with high capital requirements and are making decisions as to what is core or non-core business. Legacy capital-intensive life ties up capital. Many large European insurance groups are looking to more fee-based business, which creates an opportunity for a lot of people around this table.
Amy Ponnampalam: Certainly, in continental Europe, you can see some clients who are facing obvious solvency challenges because of Solvency II. Then there are clients who are looking at the future: do they want to exit certain legacy lines which aren't as profitable as before and are just taking management attention away from growth? They are looking for a capital-efficient exit strategy, so Bermuda then becomes a very obvious place for them to go.
Ray Brooks: In the UK, we are also seeing huge growth in the pension risk transfer business. There was a £4.4bn BPA trade recently involving the British Airways pension fund and L&G. We are seeing a wave of continuous transfer and people are trying to figure out exactly how they are going to manage their balance sheets through this busy season.
What makes Bermuda attractive?
Gareth Mee: Investment freedom is really important. In Bermuda, there are capital and potentially tax benefits, but in the main there are less investment restrictions here than, for example, in the UK.
Being able to access the North American market will be critical to unlocking that trillion-pound pension risk transfer challenge that Ray mentioned. Last year, according to our analysis, there was between £7bn and £8bn worth of private credit backing the £15bn or so of annuities written in the UK. If the market reaches £30bn this year, as it is predicted to, we are not going to be able to find £15bn of private credit assets in the UK market. Being able to access global markets is really important for UK annuities.
Paolo Fiandesio: The pragmatism and the accessibility of the regulator is something that makes Bermuda an attractive jurisdiction, with companies being able to have an open discussion with the Bermuda Monetary Authority (BMA) around investments and alternative strategies. For example, we have seen the BMA being open to discuss adjustments to the existing BSCR [Bermuda solvency capital requirement] standard model where the capital charges in the BCSR do not fully reflect the risk profile of particular asset classes.
Sylvia Oliveira: Companies can set up in Bermuda and become incorporated and licensed in a matter of weeks. The process is straightforward and streamlined, especially relative to other jurisdictions. The main advantage of Bermuda is access to the regulator. If a company needs regulatory approval or regulatory guidance on, for example, an unusual deal structure, the BMA will review the situation and provide a definitive answer within a couple of weeks. Where else in the world will a regulator come back to you so quickly?
Thomas Olunloyo: It is also worth stating that while the BMA is very responsive, that does not mean that the regulatory environment here is any less robust than it is elsewhere.
Josh Braverman: One of the big benefits of the jurisdiction is that when you try to build the most efficient portfolio possible, and then you overlay the required capital, it does not distort your choices as much as the required capital framework in some other jurisdictions.
Amy Ponnampalam: Bermuda, in contrast to a lot of Europe, is a business-to-business market. The BMA is typically regulating highly sophisticated insurers and their approach just makes a lot of sense. The industry recognises there is a lot of trust placed in market practitioners here. It is not that we are taking any shortcuts; it is not that less capital is always a worse situation than more capital. It is just a smarter way to manage business.
Iain Forrester: The capital regime is clearly an important factor. Are there other factors that apply in certain jurisdictions? For example, is the insurance accounting regime a major factor in the German market?
Amy Ponnampalam: It is a bit of both. Most of the German solutions come about because of a statutory challenge that exists in Germany. In Bermuda, if you are managing your business off a truly economic balance sheet, then you can negate a lot of those challenges in Germany.
Sylvia Oliveira: We make assessments based on both capital and the accounting. In other words, we look at the total asset requirement: reserves plus capital. Bermuda's economic-based accounting can be materially different from the US statutory accounting for certain types of liabilities. There are some instances where the total asset requirement in Bermuda is higher than the US, and in some instances it is lower.
Spectrum of deals
Chris Cundy: Is there a particular type of deal that is becoming popular?
Thomas Olunloyo: We see a broad spectrum of different transactions from reinsurance to consolidations, and so on. That speaks to the level of innovation that is possible in Bermuda. We are focused on client-specific solutions, therefore it is hard to come up with a single structure that dominates the business that we write.
Amy Ponnampalam: Moving business out of Europe into Bermuda is challenging: there are strong sensitivities around where assets are located, who is looking after policyholders and what legislation is there to protect them ultimately if something goes wrong. Reinsurance i.e., leaving as much onshore as possible, is probably as far as we could push the envelope at this point.
Ray Brooks: That would be our experience as well. Leaving assets onshore, just really taking advantage of the capital efficiencies in Bermuda, and making our cost of capital more efficient.
Sylvia Oliveira: Likewise for US transactions, many utilise a modco or co-funds withheld structure, where the assets physically remain with the cedent, and only the underlying risks are transferred. This provides is a strong form of security for cedents.
Source of capital
Josh Braverman: There is a perception that asset managers are taking a lead in forming life reinsurance companies, but that is not the only type of player. There are also some firms who would like to partner with a Bermudan company because of the high capital charges for asset intensive business they face.
Then there are investors who are purely capital focused. They do not have a strategic rationale for investing but they see the opportunity.
Chris Cundy: Have you seen insurance linked securities (ILS) coming in?
Thomas Olunloyo: We certainly see that as a growing space. If you look back at the ILS issuance in Bermuda, less than 5% have been in the life space. It's crying out for more investments and more technology.
Life is long tailed and it is more complex than property risk, however it is almost inevitable that we will see a rise in life ILS as there is a lot of capital looking for a home and with lower return expectations than reinsurers.
Gareth Mee: We have had a large number of reverse enquiries from family offices and some of the more patient private equity-style investors over the last year. They have seen some of the successes on the island and are trying to work out how they can potentially invest money into the space.
Amy Ponnampalam: Patience is an interesting issue. These are slow-moving trades, it takes a long time to get your capital back. It may not be the typical type of investment and return profile that some of these capital investors might be looking for. It is very important that any capital coming into the industry is the right kind of capital: permanent, long-term and from investors who are willing to wait for the returns.
Part one of this roundtable, which discusses the drivers behind the growth in Bermuda's life re/insurance sector, can be read here