JLT Towers Re announced the appointment of David Flandro, a former Guy Carpenter executive, as Global Head of Strategic Advisory on Tuesday—days after he gave a talk on the value of buying reinsurance at a seminar.
Flandro, who spoke last week during the Casualty Actuarial Society’s Seminar on Reinsurance, gave some eye-popping estimates of potential pension fund activity in the reinsurance sector and encouraged property/casualty carrier financial officers to up their purchases of reinsurance now.
In a statement about the JLT Towers Re appointment, Ed Hochberg, Executive Vice President-Global Head of Analytics, Banking, and Advisory, JLT Towers Re, said Flandro’s new role will focus on new business strategy, ERM and strategic and financial consulting.
Flandro will be based in JLT Towers Re’s New York office when he starts his new role midyear.
Prior to joining JLT Towers Re, Flandro was Global Head of Business Intelligence for Guy Carpenter where he led efforts on corporate strategy, international rating advisory, market entry, capital structure, credit risk advisory and many other specialized issues.
Before that, he was part of the Benfield Research team and is a regular presenter at industry events and commentator in industry publications.
At the Casualty Actuarial Society’s Seminar on Reinsurance in New York last week, Flandro urged property/casualty insurers to consider buying more reinsurance instead of continuing to retain their losses as they have in recent years.
During the presentation titled “How to Measure the Value of Reinsurance,” Flandro and two Guy Carpenter professionals reviewed metrics for measuring various reinsurance options.
“At what point does the cost of reinsurance capital become preferable to the cost of other forms of capital that we’re retaining,” Flandro asked the audience.
“This is a serious question that CFOs and risk managers need to ask now because in three or four years we will look back on this and say that was [the point] when you should have shifted back into reinsurance,” said Flandro, who was also an equity analyst for Merrill Lynch covering the insurance sector early in his career.
Among the conditions he listed as favorable to reinsurance-buying over retention:
- The rising cost of debt.
- Increasing return-on-common equity hurdles.
- Being in an interest-rate exposed sector.
- A deteriorating loss reserving picture.
- A long-term trend of short-tail loss increases.
- Falling reinsurance prices.
“Reinsurance prices have fallen in the property-catastrophe market over the last five renewals. If prices keep coming down, why not buy more,” he asked, adding that there is ample reinsurance supply from traditional reinsurers as well as hedge funds and pension funds.
Pension Fund Participation
At one point during his presentation, Flandro also provided some measures of how much capital pension could devote to the reinsurance sector, giving estimates ranging from $300 billion to $900 billion.
The $300 billion figure is too low, he said, noting that it assumes $30 trillion in pension fund assets as a starting point (a figure he attributed to J.P. Morgan), and that pension funds invest 10 percent of those assets in alternative investments, allocating 10 percent of the alternatives to insurance-linked investments.
In reality, pension funds invest more than 10 percent in alternatives. Discussions with investment managers actually put the percentages closer to 20 percent of alternatives and 15 percent of that in insurance-linked securities, he said.
Those real-life percentages “get you to $900 billion—three times the size of our sector,” Flandro said, referring to calculation by Guy Carpenter and A.M. Best that estimates capital for the reinsurance sector (including subordinated and convertible debt) at $322 billion.
“A little move on their dial equals a huge move on our dial,” Flandro said, going on to explain why he believes pension funds will stay in the reinsurance market for the long haul—even in the event of a $200 billion loss.
“Let’s say they have 1 percent of their portfolio invested in insurance-linked investments and then lose the entire position. And then yields go up to 8 or 9 percent from 3 percent.
“Of course, they’ll reload,” Flandro asserted.
He also explained that pension funds aren’t investing in the ILS market “because they’re particularly fascinated with the insurance sector,” but instead because they managing their portfolios using portfolio optimization or modern portfolio theory—essentially trying to get close to the “risk-return efficient frontier.”
They’re using Sharpe ratios, explaining that these are return divided by risk ratios and noting that a small investment in something that’s not correlated to the rest of the portfolio will increase the Sharpe ratio more significantly than the size of the investment.
Answering another frequently asked question about pension fund appetites for insurance-linked securities—what happens when the 10-year Treasury bond yield goes up to 5 percent and catastrophe bond yields lag at 3 percent—Flandro predicted the pension funds will still stay in cat bonds.
“As Treasury yields have continued to go up and cat bond yields have continued to fall, we haven’t seen any lack of appetite for cat bonds,” he reported.