Tag Archives: Evan Greenberg

Creepy Things

It has been a while since I looked at the state of the reinsurance and specialty insurance markets. Recent market commentary and insurers’ narratives at recent results have suggested market rates are finally firming up, amidst talk of reserve releases drying up and loss creep on recent events.

Just yesterday, Bronek Masojada the CEO of Hiscox commented that “the market is in a better position than it has been for some time”. The Lancashire CEO Alex Maloney said he was “encouraged by the emerging evidence that the (re)insurance market is now experiencing the long-anticipated improvements in discipline and pricing”. The Chubb CEO Evan Greenberg said that “pricing continued to tighten in the quarter while spreading to more classes and segments of business, particularly in the U.S. and London wholesale market”.

A look at the historical breakdown of combined ratios in the Aon Benfield Aggregate portfolio from April (here) and Lloyds results below illustrate the downward trend in reserve releases in the market to the end of 2018. The exhibits also indicate the expense disadvantage that Lloyds continues to operate under (and the reason behind the recently announced modernisation drive).

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In the Willis Re mid-year report called “A Discerning Market” their CEO James Kent said “there are signs that the longstanding concern over the level of reserve redundancy in past year reserves is coming to fruition” and that in “some classes, there is a clear trend of worsening loss ratios in recent underwriting years due to a prolonged soft market and an increase in loss severity.

 In their H1 presentation, Hiscox had an exhibit that quantified some of the loss creep from recent losses, as below.

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The US Florida hurricane losses have been impacted by factors such as assignment of benefits (AOB) in litigated water claims and subsequently inflating repair costs. Typhoon Jebi losses have been impacted by overlapping losses and demand surge from Typhoon Trami, the Osaka earthquake and demand from Olympics construction. Arch CEO Marc Grandisson believes that the market missed the business interruption and contingent BI exposures in Jebi estimates.

The fact that catastrophic losses are unpredictable, even after the event, is no surprise to students of insurance history (this post on the history of Lloyds is a testament to unpredictability). Technology and advances in modelling techniques have unquestionably improved risk management in insurance in recent years. Notwithstanding these advances, uncertainty and the unknown should always be considered when model outputs such as probability of loss and expected loss are taken as a given in determining risk premium.

To get more insight into reserve trends, it’s worth taking a closer look at two firms that have historically shown healthy reserve releases – Partner Re and Beazley. From 2011 to 2016, Partner Re’s non-life business had an average reserve release of $675 million per year which fell to $450 million in 2017, and to $250 million in 2018. For H1 2019, that figure was $15 million of reserve strengthening. The exhibit below shows the trend with 2019 results estimated based upon being able to achieve reserve releases of $100 million for the year and assuming no major catastrophic claims in 2019. Despite the reduction in reserve releases, the firm has grown its non-life business by double digits in H1 2019 and claims it is “well-positioned to benefit from this improved margin environment”.

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Beazley is one of the best insurers operating from London with a long history of mixing innovation with a balanced portfolio. It has doubled its net tangible assets (NTA) per share over the past 10 years and trades today at a 2.7 multiple to NTA. Beazley is also predicting double digit growth due to an improving rating environment whilst predicting “the scale of the losses that we, in common with the broader market, have incurred over the past two years means that below average reserve releases will continue this year”.

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And that’s the rub. Although reserves are dwindling, rate improvements should help specialty (re)insurers to rebuild reserves and improve profitability back above its cost of capital, assuming normal catastrophe loss levels. However, market valuations, as reflected by the Aon Benfield price to book exhibit below, look like they have all that baked in already.

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And that’s a creepy thing.

Shifting risk profiles in an arbitrage reinsurance market

There was some interesting commentary from senior executives in the reinsurance and specialty insurance sector during the Q2 conference calls.

Evan Greenberg of ACE gave the media a nice sound-bite when he characterised the oversupply in the property catastrophe sector as “that pond with more drinking out of it”. He also highlighted, that following a number of good years, traditional reinsurers “are hungry” and that primary insurers are demanding better deals as their balance sheets have gotten stronger and more able to retain risk. Greenberg warns that, despite claims of discipline by many market participants, for some reinsurers “it’s all they do for a living and so they feel compelled” to compete against the new capacity.

Kevin O’Donnell of Renaissance Re put some interesting perspective on the new ILS capacity by highlighting that in the early days of the property catastrophe focused reinsurer business model, they “thought about taking risk on a single model”. These reinsurers developed into multi-model and some into proprietary model users. O’Donnell highlighted that the new capacity from capital markets “is somewhat similar to” earlier property catastrophe reinsurance business models and “that, but beyond relying in some instances, on just a single model, they are relying on a single point.” O’Donnell stressed that “it’s very important to understand the shape of the distribution, not just the mean.” Edward Noonan of Validus commented that “the ILS guys aren’t undisciplined; it’s just that they’ve got a lower cost of capital.

Historically lax pricing in reinsurance has quickly trickled down into softer conditions in primary insurance markets. In the US, although commercial insurance rates have moderated from an average increase of 5% to 4% in recent months, the overall trend remains upwards and above loss trend. Greenberg believes that the reason why it could be different this time is “the size of balance sheet on the primary side on the large players” and that more intelligent data analytics means that primary insurers are “making different kinds of decisions about how to hold retentions” and “how to think about exposure”. Although Greenberg makes valid points, in my opinion if pricing pressures continue in the reinsurance sector, the knock-on impacts onto the primary sector will eventually start to emerge.

As always, the market in property catastrophe is dependent upon events, particularly from the current windstorm season. Noonan of Validus commented that the market can’t “sustain a couple more years of 15% off”, referring to the recent Florida rate reductions. Diversified reinsurers point to their ability to rebalance their portfolios in response to the current market. However the resulting impact on risk adjusted returns will be an issue the industry needs to address. The always insightful and ever direct John Charman, now at the helm of Endurance Specialty, highlights the need to contain expenses in the industry. Charman commented “when I look at the industry, it’s very mature.” He characterised some carriers as being “very cumbersome” and “over-expensed”.

For the property catastrophe reinsurers, the shorter term impact on their business models will likely be that they will have to follow a capital management and shareholder strategy more compatible with the return profile of the ILS funds. In terms of valuations, the market is currently making little distinction between diversified reinsurers and catastrophe focussed reinsurers as the graph below of price to tangible book for pure reinsurers and catastrophe reinsurers show. Absent catastrophe events, that lack of distinction by the market could change in the near term.

click to enlargeReinsurers price to tangible book multiples August 2013

In the shorter term, the more seasoned and experienced players know how to react to an influx of new capacity. The conferences calls demonstrate those taking advantage of the arbitrage opportunities. Benchimol of AXIS commented that “we have actually started to hedge our reinsurance portfolio using ILWs and other transactions of that type.” O’Donnell commented that “we continue to look for attractive ways of ceding reinsurance risk as a means to optimizing our reinsurance portfolio.” Charman commented that “we also took advantage of the abundant capital by purchasing Florida retro protection”. Noonan commented that “we also found good value in the retrocession market and took the opportunity to purchase a significant amount of protection for our portfolio during the quarter.” Iordanou of Arch commented that “we did buy more this quarter” and that “we felt we were getting good deals.

Right now, we are clearly in an arbitrage market and the reinsurers that will thrive in this market are those who are clever enough to use the current market dislocation to their advantage.