New Capital Entering Market Unlikely to Quickly Soften Rates: Vantage Risk CEO
Greg Hendrick, the CEO and co-founder of the new reinsurance and insurance company Vantage Risk isn’t too concerned about the new capital that has been pouring into the market this year, and its potential to drive down rates – at least in the near to medium term.
Hendrick, a 30-year industry veteran and former CEO of AXA XL, founded the company along with Dinos Iordanou, retired president and CEO of Arch Capital Group Ltd. Iordanou is now non-executive chairman of Bermuda-based Vantage Risk.
“The amount of new capital coming in is only a fraction of what has been impacted by all the loss activity from 2017 to 2020,” he said in an interview with Carrier Management. “From a macro perspective, in the near to medium term, particularly on the insurance side of the business, there has been a sharp reduction of capacity in many of the lines of business we’re going to target, and placements are not getting done to the same level they used to.”
Hendrick said most of the lines of business that Vantage Risk is writing are “shared and layered,” so no one carrier provides a 100% of policies with hundreds of millions of dollars of limit.
There have been a number of capital raising initiatives so far this year by existing players, such as Beazley Hiscox, Lancashire, Fidelis and QBE, along with several new companies entering the market, including Conduit Re’s Bermuda-based holding company, Conduit Holdings Ltd., which raised $1.1 billion in an initial public offering earlier this month, and Inigo Ltd. a new London insurance group, which raised $800 million and has received approval to start underwriting at Lloyd’s on Jan. 1, 2020. All these companies are expecting to benefit from the hardening market and improved terms and conditions.
Vantage Risk and parent company, Vantage Group Holdings Ltd., launched early in December with $1 billion of equity capital, provided by private equity firms The Carlyle Group and Hellman & Friedman (H&F) as well as management.
In a recent report, AM Best said, it is unclear whether “the new cycle of rapid capital expansion” across the market will dampen any price improvements. “Capital erosion is not the main driver this time (unlike previous hardening phases)…,” said AM Best. “On the contrary, rates are increasing despite – not because of the lack of – excess capital.”
Hendrick emphasized, however, that he and his team will be closely watching the effects of over-capacity from a micro-perspective. “We’ll be very diligent about how we look at our pricing and the margins that are available, with returns that are available.”
He said Vantage Risk’s management team, and, most importantly, the company’s private equity shareholders, are completely aligned with the idea that “if business starts to lose margin, we will not write the business. We’ll address and shrink our capital base to fit with the risks that we can underwrite.”
However, at the moment, “the macro outweighs the micro,” he said. “I just don’t think that’s going to be a conversation we’re going to have in the medium term. It’s a very firm market, at the moment.”
The company has begun to write property catastrophe and specialty reinsurance – just in time for the January 2021 renewals. In 2021, Vantage intends to launch insurance products in both the Bermuda and North American markets.
“On the insurance side, we’ll be more focused on the longer tail lines. I don’t have a percentage, but the majority of it will be longer tail lines of business, like excess casualty, professional lines – both D&O and E&O – and other classes such as healthcare liability,” Hendrick confirmed.
The team is currently in the process of looking to acquire an existing shell company and/or identifying potential fronting partners, “so that we can start writing both surplus lines and admitted business in the U.S. as soon as possible.”
Hendrick said the company’s tagline is: “We see risk differently.”
“I think of that in two dimensions. One is in the near term – the fact that most of the existing carriers, particularly on the insurance side, have cut back capacity or closed their businesses. They are withdrawing from those classes.”
While these are not new risks to protect, he described this near-term aim as an opportunity to underwrite profitably and provide capacity to clients and brokers at a time when they need it.
But looking through his long-term lens, Hendrick said, there are more risks that are uninsured than are insured. “We are passionate in the mid to long-term of closing that gap between the economic loss and insured loss and doing that in a way that’s creative. Now, can we do it on our balance sheet alone? No, of course not. We’re part of a market and an industry, but we think we can over time develop a perspective and analytics that will allow new risks to be covered that haven’t gotten enough insurance in the past.”
In other words, Vantage Risk plans to help close the re/insurance protection gap.
He said a big advantage for Vantage Risk is that it operating as “a blank piece of paper.” “We’re very happy to have clean capital from our shareholders, and yes, it’s great not to have legacy reserves, but it’s even better not to have legacy technology,” Hendrick continued.
The aim with Vantage Risk’s technology is to rent the platforms that do not add value and build systems on a proprietary basis when they add value. “It’s those proprietary systems that make the difference in terms of efficiency and analytics.”
The company aims to be more efficient about submission intake, Hendrick continued. “How can we be more efficient about increasing the premium per colleague in the organization and being a more affordable and cost-effective provider from an expense perspective?”
Another advantage of being a start-up is that Vantage Risk is able to attract some very talented people, he noted. “A lot of people are in companies that are shrinking or closing businesses, or in general creating opportunities for us to hire great talent.”
This combined with the blank piece of paper for technology “really lets us get curious and creative about how we solve our clients’, our brokers’ risk problems over the medium to long term.”
Hendrick described an atmosphere of “nervous energy” at Vantage Risk. “Oh my goodness, there’s no renewals! We’ve got to go get everything! It creates a good energy level.”
How did Vantage Risk become a reality? Hendrick recalled a phone call he received from Iordanou in February after he left AXA XL. “[Dinos] said to me: ‘Look, I think this market’s going to be a hardening market, and we should think about … launching a new carrier,'” he continued.
“All of us – Dinos, myself, and the investors – saw what was coming at the end of 2019, and beginning of ’20,” he said, referring to the initial drivers for this year’s hardening market.
In 2017 and 2018, the industry shouldered expensive property catastrophe losses, he explained. Then in 2019, there were fewer catastrophes, but the market began to see the emergence of loss-cost inflation on long tail lines in the U.S. and Europe. “Even before the COVID-19 crisis, the market was hardening,” Hendrick affirmed.
“Full credit to Dinos for making the call…, but, I think, all of us were aligned around that idea that something was happening in the marketplace with all the loss activity and retrenchment from existing carriers,” he continued. “Then, COVID came. If it was COVID in isolation, I don’t think a lot would have changed [with market conditions]. But, COVID was on top of all the other uncertainty and loss impact. So that really pushed the momentum forward.”
Discussions to form a new company began in earnest in May, he said, and the company was launched in December.
When asked if Vantage Risk would ever go public, Hendrick said: “We’re going to take it year by year. We’re going to look at what the opportunities are – whether that’s to go public, whether that’s to raise debt, using all the leverage you can use when you’re running an entity.”
Whether a company is public or private, management must do the best they can for their shareholders as their core constituents, he said. “You have colleagues, you have customers and brokers, and you have the community – all four of those are the constituents of management. But obviously the shareholders, in my mind, are the first priority.”
If it’s best for the shareholders to stay private, Vantage will stay private, he said. “If it’s best for us to go public, we’ll go public. That will come to pass over time as we have successes and depending on where the markets are in terms of opportunities. To me, there’s not a preferred a route to go. You just do what’s best for the shareholders.”