Body Shop founder Anita Roddick once said: ‘There are only two ways of raising money: the hard way and the very hard way.’ Never has that been truer than in recent months. But the squeeze on capital has been easing, writes Mairi Mallon.
The financial markets meltdown peaked in the autumn of last year, caused the credit markets to seize and wreaked havoc on equities. While reinsurers were themselves adequately capitalised, the capital markets effectively closed.
Now, after weathering the financial storm, the iron-like grip on capital has been loosened over the summer. Hedge funds and private equity may still be reeling from the market turmoil, but there is an upsurge in interest in the insurance and reinsurance markets once more.
Relatively low reinsurance pricing and value is still considered below book, which still makes raising capital far from easy, but there are now more than a fewgreen shoots coming through both directly, through catastrophe bonds, and indirectly, via equity markets.
Mergers and acquisitions are gaining momentum, as well. The opportunities ahead are quite clear for this year and, if you know where to look, there is money out there to be had.
Here, Global Reinsurance gives you a ten-point guide on how to get your hands on that much needed capital.
1. Call in the experts
If you haven’t got one already, get yourself a finance professional who can prepare the foundation of your funding exercise and look at all the alternatives.
2. Get yourself a big name
If you are raising capital, whether for a start-up, sidecar, for a merger or to put into an existing company, make sure you have a big hitter at the top of your team list.
Take a leaf out of the class of 2001 and class of 2005 start-ups, which wooed a list of retired A-list executives off the golf course and back into the boardroom, with the younger guns doing the hard work.
The sage hands departed once they had schmoozed the financiers and seen the companies off to a flying start. Semi-retired veterans can also be a huge source of information and support. They have more than likely tried and failed, and lived to try again.
3. Source potential investors
Either do this yourself, with your “big name” (see step two), or engage an investment banker or merchant banker to do this for you. The traditional sources are opening up again: private equity, Mutual funds and large investment banks.
They will normally go for tried-and-tested players for fixed-term periods or fast-yield insurance-linked instruments.
Major investors spotted by Global Reinsurance at Rendez-Vous include: Credit Suisse, Goldman Sachs, Lloyds TSB and Calyon.
4. Go the M&A route
Don’t think start-up; think merger. All the experts agree: this is not the time to start a company. With companies trading under book value, there are better things to spend your money on. For a class 4 Bermuda (re)insurer, you would need an estimated $1bn in start-up capital to be considered a player in this market – and not many people could get a rabbit like that out of a hat in today’s climate. Lloyd’s has much lower capital requirements, but the best advice is if you want a quick injection, get a sidecar or merge.
Experts say that, over the next 24 months, M&A activity is likely to be robust. Opportunities abound, and as insurers and reinsurers take advantage of them, others will follow. The most famous of the mergers in 2009 was the battle for IPC Re by Max Capital and Validus (see feature, page 14). It was a soap opera that Validus eventually won. There have been other attempts by companies looking at all-share, nil-premium deals in order to access bigger capital pools.
5. Consider Lloyd’s
Lloyd’s was there long before sidecars as a vehicle which could be set up and exited quickly. If you can put up with the slowness of setting one up and jumping through the FSA red-tape, it can be a solution from which investors can exit quickly and has a well-established infrastructure.
6. Sidecars (and ILS and cat bonds)
These are nice and short term for today’s market, when investors are quite simply not willing to commit their money for any length of time. Bryan Joseph, global head of the actuarial group at PricewaterhouseCoopers, says capital is focusing more on sidecars and ILS.
“Capital will be quickly in and quickly out in one- or two-year sidecars,” he says.
“Investors will ride the market at times when it is beneficial for them. This is different to the old days, when capital formed after a storm and created new entities in Bermuda or the Cayman Islands.”
Joseph added: “It’s a natural evolution of how investment takes place. There are a limited number of people who understand how investment in insurance works.”
In the capital markets, major issuers, as part of their risk and capital management strategies, are using cat bonds to complement and diversify their core placements. With capital flowing again, cedents and markets have options, and they are taking advantage of them. Guy Carpenter has said there is a possibility that cat bond issuance activity could reach $3bn in 2009, especially with increased sponsor interest due to the reduced clearing spreads on the July transactions.
7. Remember Bermuda
Well, despite everyone shouting loudly about how Bermuda is not the place to go, that a start-up will not work, that Obama will shut it down, that there will be no class of 2009, 2010 or 2011, if there is a dislocation caused by a man-made or natural disaster, it is still the ideal place to set up. Providing you can find the capital (see points 1-6 and 8-10), the infrastructure is all there for you to be incorporated and underwriting within a fortnight – something you just can’t do at Lloyd’s. And remember, sometimes people want to set up a company that lasts longer than a couple of years.
8. Work with existing players
While keeping up with the big boys is going to cost you a sizeable equity position, in these markets you may not care. Because if that's the route and if you need it to grow, you will own a percentage of a much, much bigger and more successful business than by any other route. Berkshire Hathaway is an old favourite to tap up, but others will help fund new ventures at the right price. A new Lloyd’s non-marine syndicate, set up by four former Heritage underwriters, is said to have got 20% of its capital from Flagstone Re, which itself was set up by hedge fund money back in 2005.
9. Raise your own through rights issues
These can be used to take advantage of improving market conditions for the reinsurance industry. Chaucer raised £75m ($120m), followed by Catlin, which raised $200m.
Beazley raised £150m ($240m), and Hardy then followed suit with a smaller rights issue of £40.3m ($65m).
10. Offer an exit strategy
Investors want to know when they are going to get their money back. This is something that is spurring on the current rumours of mergers within the Bermuda market; investors from the class of 2001 and class of 2005 want out. Investors are opting for more short-term investments in order to gain more certainty over their return on capital, and very few insurance and reinsurance companies have, at the moment, reached the threshold that they advertise. Consequently, until the industry figures out ways to be more attractive to capital, it is often better for investors to come in on a short-term basis.
Mari Mallon is a freelance journalist