Same old guff

Now that the US hurricane season is over without any material events, I had a quick look over a few transcripts of conference calls in the specialty insurance and reinsurance sectors to see if there was any interesting comments on where the market is going.

Nearly everybody claims to be mitigating the challenging market conditions by ducking & diving between business classes whilst keeping their overall underwriting discipline. The softness in the reinsurance market has spread into the insurance market, albeit not to the same extent. The reality is that results continue to be flattered by reserve releases, low loss activity and improved loss trends. Market realities are slowly being reflected in ROEs which are coming down to the low double digits.

Nearly all of the reinsurers are claiming to be the winners in the structural changes in the “tiering” of the market whereby cedants are reducing their reinsurance spend and concentrating that spend amongst a select group of reinsurers. Everybody has special relationships and the gravity defying underwriters! That same old guff was the typical response in the late 1990s.

The only interesting comment that I could find was from the ever colourful Ed Noonan of Validus who, after claiming that not everybody is as disciplined as they claim (he was talking about the large generalist reinsurers), said the following:

“It’s unfortunate because the market has had such strong discipline for the last decade. There are no magical segments that are beautifully priced, and the idea that a well-diversified portfolio poorly priced risk makes sense is an economic capital model-based fantasy.”

The last sentence reminds me of one of my favourite quotes from Jim Leitner of Falcon Management that “there is no real diversification in owning a portfolio of overvalued assets“.

My view is that few economic capital models in the insurance market which are currently being used to allocate capital to business classes are taking such arguments seriously enough and most are likely over-estimating the benefit of diversification across soft or under-priced portfolios.


9 responses to “Same old guff

  1. Could you name a few more of those insurers you look at ? The Validus conference call transcript was definitly worth reading :-).



    • Hi Eddie, hope you are doing ok.
      I always like Noonan at Validus and Charman at Endurance on the specialty side. Charman didn’t say anything meaningful this time and seems more subdue these days after the failed Aspen deal!. I think the specialty guys are getting squeezed by the big insurers and reinsurers, particularly the European composites, in the market tiering that’s going on so it’s no surprise that Noonan is having a pop at them.
      On the property cat side John O Donnell from RenRe gives good insight (they really sound like a business model looking for a new strategy these days….). Also Evan Greenberg at ACE normally makes sense from an overall market point of view.
      I haven’t looked the AIG figures in detail but wasen’t that impressed about the new CEO’s answer on reserves in their call, the one AIG strategy makes sense – I’m sure there is plenty of overhead that can be taken out if they move away from the silo approach (always easier said than done).
      Haven’t really had time to look at any more but the general flavour is the same old defences of existing business models. I suspect though that some are going to have to admit defeat in 2015 given the lack of large losses and look to bulk up through M&A.
      Let me know if there is some commentary that you like.
      PS- Lancashire announced a special dividend that’s over 10% yield yet their stock went down. Can’t figure that one out. Also Swiss Re will likely declare a nice dividend based off their Q3 results (and their stock went up!!)

  2. Hi Mozoz,

    I am doing fine, thanks. Please don’t let it trouble you if you don’t see me that often lately, I prefer to comment only if I have something to say to generate a high signal/noise ratio, not commenting for comments sake. Your blog is high on my RSS list where it will remain.

    Thanks a lot for your comments. I just added a couple of companies to my watchlist and will go through their latest call transcripts.

    Regarding AIG, I currently read the 10-Q, nothing spectacular so far (neither good or bad) I would say. The answer regarding reserves is consistent to what Bermosche said in the past, nevertheless I was a bit taken aback. Unless they think their reserving process is sufficiently robust and that they make more money on their investment portfolio I wonder why they wouldn’t reserve a bit more conservatively.
    Agreed regarding OneAIG… there is always some overhead in such a big shop and Benmosche just finished bringing it back on track. Whether it can be done that easily remains to be seen, though.

    I can offer you some Albert Edwards stuff in return in case you are interested. As always not for the fainthearted but I think he makes some interesting points. And I will also have a look at Lancashire.



  3. Thanks Eddie.
    Anything intelligent is always worth considering, appreciate offer of Edwards, send stuff to previous email or blog email whatever suits.

  4. I went through the call transcripts finally. What strikes me is that, as you already said, everyone seems to have a world class underwriting team (at least in certain areas) that knows how to extract value from the currently soft market. RenRe and ACE at least decreased their revenues, ie they seem to walk the walk, not just talk the talk.

    A soundbite that I found interesting:

    Over the 20 years plus, that we have been in operation, we have seen a significant number of devastating cat events. Much of the capital that has entered the business has been particularly fortunate with the timing in taking cat risks, particularly U.S. wind risk. It has been nine years, since a major hurricane defined as a cat three or greater has made landfall in the US. This is unprecedented in the historic records going all the way back to 1880.

    According to our calculations, this is significantly below a 1% probability of occurring. So said another way, investors investing in Atlantic hurricane have enjoyed a 1 in 100 level of return for the last nine years. However, it should not be overlooked that the annual odds for a land falling major hurricane in the U.S. remains unchanged at over 40% per year. (RenRe)

    There was also something interesting in the ACE call, I will post that later.

    Also something from BRK’s latest 10-Q:

    Although strong price competition in property and casualty persists in many property/casualty markets, volume increased in selected lines of our North American and international operations. (p.26)

    Since they made an underwrting profit over the last 9 months there seem to be some pockets of value after all…



    • The RenRe quote is one I picked up on, its an interesting observation, when put like that it sounds troubling for the ILS guys getting 200-300 odd bps for their trouble!!! I was planning to use the quote in a post on latest IPCC report (I am just not getting any time these days to come up with something worthwhile to post!!!). In fact Martin Wolf in the FT today stole my post theme. You snooze, u lose…

      I hear what you are saying about BRK comment. BRK are taking profitable business off somebody else yet most others are increasing premium, so who is loosing here!!!! To be honest Eddie, its all BS, growing in a soft market ALWAYS ends in tears……


  5. Precisely what I was thinking (and tried to express for some time). Insuring a 10%, say, expected loss at a price of 3% works until it stops…

    I think Endurance (just from the names I quickly looked at) seems to be on the loosing end at least. They clearly say that premium volume beats everything else for the time being. We shall see.

    There was an interesting comment in the ACE call, too:

    As I said in recent calls, depending on the class of business I think the level of rate increases are either not keeping pace with loss cost or barely keeping pace with loss cost.

    Which means less or no margin of safety for some people out there.

    Evan Greenberg seems to be quite a character, btw…

    Re BRK: I don’t have the quote at hand but they said that their combined ratio in reinsurance is below 100 for the last nine months. Without that the quote above wouldn’t be that interesting. As you said, someone is loosing…


  6. Two more from the Markel earnings call:

    Regarding the US:
    The rate environment in the U.S. segment remains competitive. However, we continue to achieve modest single-digit rate increases on small to medium sized risks across the various divisions within the segment. Large accounts remain under competitive pressure and prices for property and casualty lines on Fortune 1000 business remained soft.

    Regarding reinsurance and international insurance:
    As Mike said, all areas of the P&C market remains competitive. The only difference really is the degree to which they’re competitive. The International Insurance and Reinsurance segments are probably among the most competitive in the market today.

    We’re in the process of completing budgets and plans for 2015 and borrowing [ph] any significant market changes, organic growth is going to be difficult to come by in 2015.

    Which basically confirms what the others said.

    Btw, can you explain me what is meant by “one-one renewal” ? Does it mean that policies are extented for another year or so on equal terms regarding coverage and pricing ? Google didn’t help me on that one…


    • 1/1 means the 1st of January renewals, about 60%-70% of reinsurance treaties incepts on the 1st of January (and most are for 12 months) so it is a critical renewal time in the business, also dictates how year will turn out.
      Hope that helps.

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