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The key to navigating a hard market

The hard market is here to stay. But new opportunities are still available – here’s how industry veterans spotted the potential for an insurance start-up, raising $1.1bn on the London Stock Exchange in December

Corporate Financier article image 2021Storms. Wildfires. Floods. A pandemic. Things have become hard in the insurance industry. A ‘hard market’ is where there’s a reduced supply of and higher demand for insurance, historic payouts are increasing and premiums are going up. At the lead-in to these natural disasters, big insurance companies had been consolidating, and institutional money was seeing less opportunity for varied investment strategies, with only four insurers remaining quoted on the London Stock Exchange (LSE).

With all this happening before the pandemic struck, industry veterans Neil Eckert and Trevor Carvey, who had known each other for more than 30 years, put their heads together. They could see the market was moving towards diversified insurers. The opportunity, they thought, was to aim for an IPO for a new ‘pure play’ reinsurer, coming to market without historic exposure and a clean balance sheet. In December 2020, just over a year after they first spoke, Conduit Re’s offering was listed with a market value of $1.1bn.

“We thought insurance markets were hardening and rates were starting to rise,” says Eckert. “With the losses that the market made over the previous few years, there were a lot of claims around and so the market was going to have to start putting rates up. By the time COVID-19 struck, that created a mini-crisis of its own for insurance markets. The other thing that happened was that there had been a tremendous amount of consolidation and, by the middle of 2020, there were only four insurance stocks left on the London stock market – Lancashire, Beazley, Hiscox and the Royal. So, there was a shortage of ways for public institutions to play the opportunities. We felt that there was a really good opportunity presenting itself to us to do an accelerated IPO.”

While insurers and reinsurers have been shaken by the spread of the virus, Conduit Re does not have the burden of a legacy portfolio. Being legacy-free from past insured losses is an advantage in Conduit Re’s day-to-day business. The fundraise was helped by one of those four listed companies, the Royal (or RSA), being the subject of a £7.2bn bid.

“That was extremely helpful,” says Eckert. Commercial insurers Amlin, Catlin Group, Novae and Hastings have also been taken over in the past decade, leaving three big listed sector companies in London. In July 2020, insurtech company Lemonade listed on the New York Stock Exchange. Founded in 2016, it has a market cap of $5.5bn.

Experience counts

At the same time as conducting investor presentations, Conduit Re was recruiting underwriters and attempting to gain the necessary regulatory approval and credit ratings to do business. “There were multiple work streams,” says Eckert, “and we probably did more than 100 institutional investor meetings.”

Lockdown ways of working were “remarkably efficient”. Eckert contrasts it to his experience launching the IPO for Brit Insurance in the mid-1990s: “You could start at eight in the morning in London and by early evening you had moved on to New York, and then later on to Los Angeles. It was very different to previous IPOs and fundraisers that I’ve done, where I’m catching planes and driving around cities. We just had meetings back to back to back. The machine was in operation 24/7. There was a lot of momentum; there were eight to 10 weeks of very intense activity and then suddenly we arrived at the finishing line.”

With the prospectus noting “capacity reductions” in the reinsurance markets, Conduit Re expects to write $472m of premiums in its first year of operation, with growth forecast to increase to $626m in year two, $757m in year three, and rising to $966m by year five. “The market needs new entrants when markets are hard,” says Eckert, “when some of the major incumbents are reducing their lines and exposures. There’s opportunity for a new player.”

A well-timed IPO

This pitch, along with Eckert and Carvey’s history and contacts in the industry, meant that the IPO had strong support, becoming the second biggest (after The Hut Group) to hit the LSE in the second half of 2020. Eckert chose London, he says, because “it’s where I’ve done a lot of IPOs before. We’re familiar with the institutional investors and, with only four quoted stocks, there was demand for the opportunity.

“You have to get a lot of things all pointing in the right direction to IPO a company at the outset. But the opportunity presented itself and the further we looked into it, the more we realised that we had a good chance of raising the money.”

The lead corporate finance adviser was Gavin Kelly at Kinmont, a former UBS banker who set up the specialist boutique adviser in 2003. Conduit Re engaged Jefferies and Panmure Gordon as joint bookrunners and global coordinators. BDO were the reporting accountants and Travers Smith provided legal advice to the company.

“It was a complex, fast-paced transaction and remote-working arrangements do present further challenges,” says Tom Coulter, a partner at Travers Smith. “We’ve worked on a number of IPOs in the past six months, entirely remotely, and I think communication and dialogue are key.” Given the start-up nature of the business, Coulter says, “there wasn’t the usual IPO readiness preparation from a legal and financial due diligence perspective. The key was having a solid business plan” – as well as the track records of Eckert and Carver.

Once investor appetite had been confirmed, steps towards regulatory approvals, ratings and licences had to be put in place “very early on, in order to hit the IPO window for the insurance market”, Coulter continues. Conduit Re needed to be “sufficiently capitalised to be able to obtain the AM Best rating”. That in itself was another complexity, as a start-up couldn’t meet the conditions before it listed. There were a lot of discussions with AM Best and the FCA.

Other complexities included the management incentive plans, which were “more akin to a private equity fund model”, explains Coulter. In addition, there were the timing of licences, coordinating tax requirements and local counsel in Bermuda – where the company has its headquarters – and FX arrangements around the capitalisation required to pass the AM Best ratings, which provide the standard for insurance companies.

Conduit Re is looking for organic growth. “I find that most consolidation M&A activity takes place at the back end of an insurance cycle and I feel we’re at the front end,” says Eckert. He feels that M&A would be a distraction to the business plan, although fundraising is possible in the future.

Will the ‘hard market’ lead to more start-ups in the space, or has Conduit Re filled the gap? “There will be more capital in the market,” says Eckert, “but that doesn’t derail the thesis of a hardening market as the market leaders cut back. The limitation on that is the number of credible management teams who can go to market.”

About the article

Read the full article extracted from Corporate Financer May 2021 edition. Exclusively for Corporate Finance Faculty & Faculties Online members, you can access our highly regarded magazine in its originally designed form, and our extensive archive brought to you by the ICAEW Corporate Finance Faculty.