Hesse Digital:
A Unique Investment Opportunity in
“Digital-First” Insurance Underwriting
Hesse Digital presents a compelling investment opportunity, offering access to both growth and income through insurance underwriting returns.
By providing capital to support Hesse Digital’s underwriting of specialty insurance risks, institutional investors can diversify their portfolios and achieve attractive, uncorrelated returns. Insurance markets often operate independently from broader economic trends, providing a hedge against economic downturns and traditional market volatility. For instance, during the 2008 financial crisis, while UK equities fell 29.9%, the Lloyd’s insurance market saw gains of 17.7%. Similarly, during the coronavirus pandemic in 2020, UK stocks fell 26.1% while Lloyds of London’s syndicates were up 16.9%.
Investing in Hesse Digital offers institutional investors a unique chance to access uncorrelated, attractive returns in a highly specialized insurance market. With strong underwriting returns, dual-use assets, and favorable market conditions, Hesse Digital provides a compelling opportunity for both growth and income. At Hesse Digital, our growth is powered by our digital services rather than competing on price. As our gross written premiums (GWP) rise, we don’t focus on displacing existing insurers at renewals. Instead, we work closely with Brokers and MGAs to build or shift complete portfolios, fostering long-term, strategic partnerships. This approach enables us to expand sustainably and profitably, without the need for aggressive rate-cutting on a risk-by-risk basis.
Portfolio Diversification:
Insurance underwriting is driven by factors such as natural disasters, geopolitical events, and industry-specific risks, which tend to have low correlation with traditional asset classes like equities and bonds. This diversification can smooth portfolio volatility and improve risk-adjusted returns.
Access to Specialty Markets:
For investors already in the insurance industry, Hesse Digital offers access to new products and regions without the need for direct market entry, reducing execution risk. Beyond capital investment, there is potential for strategic partnerships and product innovation collaboration, leveraging Hesse Digital’s digital-first model.
Attractive Underwriting Returns:
Investors can earn profits from the difference between premiums collected and claims paid out. Underwriting returns are typically strong, with potential returns of 15% to 30% in favorable years, albeit with exposure to losses in adverse years.
Niche Focus with Digital Efficiency:
Hesse Digital specializes in niche, specialty risks, processed through a streamlined, digital-first approach that enables outstanding risk control and operational efficiency. This positions Hesse Digital to capitalize on evolving market demands and maintain a competitive edge.
Investment of the Float:
The capital collected (float) from premiums can be invested in equity and bond markets, generating additional returns. This “double use” of assets allows investors to benefit from both underwriting profits and investment income. Historically, this approach has yielded an additional 10% to 20% return on invested assets, enhancing overall profitability.
Uncorrelated Returns:
Low or no correlation with traditional asset classes, providing a hedge in diverse market environments.
Attractive Return Profile:
Targeted annualized returns between 20% up to 35% from underwriting and investments.
Dual Asset Utilization:
Investors benefit from both underwriting returns and the investment of the float in the bond and equity markets.
High Barriers to Entry:
Insurance underwriting requires significant expertise and regulatory compliance, creating a competitive moat.
No Direct Competition:
Hesse Digital operates in niche markets with little direct competition, providing a unique investment opportunity.
Hesse Digital’s advanced data analytics and sophisticated technology provide robust risk management capabilities. This enables precise risk selection and proactive management, reducing exposure to adverse outcomes.
Given current favorable market conditions, Hesse Digital is well-positioned to grow its business by expanding its portfolio of high-quality risks. This provides an excellent opportunity for investors to participate in the growth of a top-tier insurance undertaking.
In addition to underwriting profits, Hesse Digital invests its premiums and reserves in high-quality bond portfolios, generating attractive investment returns in the current market. For investors, this represents a dual income stream, with returns from both the underwriting business and investment activities.
Investing in specialized insurance structures can offer several tax advantages depending on the investor’s status, location, and structure of the investment. It’s important to note that tax advantages can vary significantly depending on the investor’s country of residence, legal structure, and changes in tax regulations. Below are some possible tax benefits:
1. Tax Deferral on Profits
Insurance business accounting allows for the deferral of taxable profits. Insurers may build reserves for claims payments, which means profits are not taxed until the liabilities are closed. This can offer a tax timing advantage compared to more traditional investment vehicles where profits are typically taxed annually.
2. Capital Gains Treatment
In certain jurisdictions, profits can be treated as capital gains rather than income. Capital gains often benefit from lower tax rates compared to income tax, providing a more favorable tax outcome for long-term investors.
3. Tax Relief on Losses
Losses from underwriting activities can be offset against other income, reducing overall taxable income. Corporate structures may also be able to offset losses against future profits.
4. Inheritance Tax Planning
Insurance structures can be part of broader inheritance tax planning. Assets tied up in the insurance are often treated favorably in inheritance tax assessments, particularly if the investor is a corporate or the investment is held within a trust structure.
5. Access to Offshore Investment Structures
Investors may use offshore structures such as corporate entities in tax-efficient jurisdictions. Offshore corporates can benefit from reduced corporate tax rates or even avoid certain taxes that may apply to individual members based in high-tax jurisdictions.
6. Pension and Retirement Investment
Investing in insurance through certain pension funds or retirement accounts can offer additional tax deferral or tax-exempt growth, depending on the structure of the pension or retirement scheme.
Investors and their managers can take advantage of a unique benefit in the insurance industry known as the double use of assets. This refers to the ability to use qualifying investments—such as stocks, bonds, real estate, or infrastructure investments—not only to generate returns from the original investment but also to support insurance underwriting activities. By using these assets to underwrite insurance, investors can earn additional profits through underwriting gains and the insurance float.
1. Double Return Potential
Investors benefit from returns on both their existing investment portfolios and from the profits derived from insurance underwriting. This structure allows assets to serve dual purposes, enhancing the overall yield on the investment. For example, an investor’s stock portfolio could continue to generate returns while also supporting the underwriting of Hesse Digital’s insurance products, thereby adding a second revenue stream through underwriting profits and insurance float management.
2. Underwriting Profits and Capital Gains
Insurance underwriting offers the potential for profit not only from underwriting activities themselves but also through capital appreciation. Investors may experience capital gains when selling insurance capacity to other insurers or new investors. This dual profit stream makes insurance investments highly attractive, especially in markets with a strong demand for insurance capacity.
3. Valuation of Insurance Business Books
The value of an insurance portfolio is often measured by the price-to-book (P/B) ratio, a key valuation metric for public insurance companies. In 2023, the weighted average price for Lloyd’s syndicate capacity at auction was 43.2p per £1 of capacity, equating to a P/B ratio of approximately 1.86x. This valuation is in line with industry benchmarks such as Chubb Insurance (P/B 1.82x) and Berkshire Hathaway (P/B 1.62x), underscoring the profitability and value of insurance business books.
By leveraging this dual use of assets, investors in the insurance industry can significantly enhance their return on investment through underwriting profits, capital gains, and asset appreciation, making it a compelling strategy for portfolio diversification and long-term growth.
The Best Market Conditions in a Generation:
The global insurance market is currently experiencing a “hard market” cycle, driven by several factors:
• Catastrophic Events:
The higher frequency of natural disasters in 2017 and 2018, followed by the COVID-19 pandemic, has reduced the availability of capital in the insurance market, pushing prices higher across most insurance lines.
• Recent Market Disruptions:
With Hurricane Ian in 2023 further straining the market, insurance pricing has risen significantly, making it an attractive time to deploy capital into the sector.
• Super-Cycle Opportunity:
The current phase of the insurance industry, characterized by rising rates and tighter underwriting conditions, offers highly favorable conditions for investors seeking strong returns from underwriting.