Hard market has “legs” all the while investors need convincing to come back: Bermuda execs

The hard market conditions have momentum given the large numbers of uncertainties facing (re)insurers and the difficulty of attracting new capital, according to a roundtable “market barometer” discussion of leading executives held in Bermuda last month by The Insurer.

Commenting on market conditions, Stephen Catlin, executive chairman of Convex, said: “I've never seen anything like it in my life. You've got all these different factors going on and we as an industry collectively have an opportunity through all this turmoil to get products that are understood by the brokers, dare I say it by the carriers, and certainly by the policyholder.”

Ariel Re CEO Ryan Mather commented that pricing “has definitely moved in the right direction, and not before time”.

The executive was speaking shortly after the reinsurer announced it had secured $270mn of capital from five new institutional and family office investors to support exciting growth opportunities in 2023.

“We've had a pretty tough last half dozen years, and that's really frightened away many of the capital providers,” Mather said of the industry. “We’ve burnt up a lot of calories raising the capital that we did, and it was really off the back of too many broken promises by the industry to capital providers in the past.”

Speaking about the industry, Mather added: “We certainly need to be here for a number of years yet before we can then say to the market or the capital providers: you can trust us again.”

Catlin suggested that the industry would need to show at least two decently profitable years in a row to attract capital back.

“Whether two years is enough, time will tell,” he said. “But the only people talking about new capital coming into the market at the moment are insurance brokers. The market doesn't like insurance balance sheets, and that's visible now. There are a lot more troubles around.”

Catlin said that the current situation is different to the last big price hike seen after 9/11, when cash flowed into the industry.

He listed a series of issues facing the market including climate change, a casualty hole, the uncertainty resulting from the war in Ukraine, Covid still lingering, mark to market losses and inflation.

“We've never seen so many things out there that are likely to get worse rather than better in the short term,” he said. “For that reason, I think attracting new capital is going to be, I would not say impossible, but very, very difficult.”

Not an event driven cycle change

When asked about the potential longevity of the hard market, Aspen group CUO Christian Dunleavy said: “My view is it's got a lot of legs. There's nothing that I can see that suggests that there's going to be a sudden steep drop off. It’s not an event driven cycle change. It's much more organic fundamentals.”

Dunleavy added that the risk-free rate has gone up significantly as well “so the rate has to flow back up”.

“We think there's incremental capital that will come in over the next few years, but I think it'll probably be largely offset by additional limit that needs to be purchased,” he continued. “So that's probably going to keep an equilibrium around the supply demand equation.”

Trevor Carvey, CEO of Conduit Re, noted that the performance of the industry in recent years meant a change was needed.

“If you look at where stock price returns have been in the last seven or eight years, it’s probably been in the brokers and not the reinsurers,” Carvey said. “So it was overdue. I think in that respect, it was a step in the right direction. It’s just a natural market evolution and it was going to happen at some point.”

Conduit Re launched in December 2020. Carvey stated that the launch has turned out to be well timed, although he noted the challenges from events such as winter storms, Hurricane Ian and the war in Ukraine.

The executive noted that the supply-demand imbalance is pushing up rates on the cat side. But he also highlighted the impact on other business.

“As much as where clients are currently being squeezed on rate driven off the back of both reduced cat capital and inflation led changes, it’s also the all risk rate , the non cat piece which is also going up," he said. "That's a big part of our industry and the non cat piece probably represents most of what we do. Even though you guys and the market generally love to talk about cat, it's the non-cat piece that’s the engine - and that's also going up significantly.”

Aspen’s Dunleavy said that the investor demands of the industry are real. He suggested that large cat loss years should be assumed to be the norm now.

“I still have a concern that reinsurers are still holding a lot of uncertainty risk,” he said. “Retro has really sliced out the uncertainty. Primary insurers were able to retain most of the [reinsurance] contract terms and they probably are broader than they should be.

“I think there's work to be done, particularly around contract language, because I think reinsurers are still in the middle holding a fair amount of non-model uncertainty there.”

Dunleavy said that a lot of work was done at 1.1 on contract wordings. But he said that there still needs to be work on issues such as reinstatements and radiuses of wildfires.

“We probably dug in longer than others actually on the contract wording topic in December, and lost a bit of business on it, but we felt like it was the right thing to do,” the Aspen executive said. “I think we're going to be in a pretty constructive environment for a long time, for the next few years at least, and I think that's okay. You hear a lot about relationship, and that’s important. But relationship at an inadequate return doesn't work.”

Lara Mowery, global head of distribution at Guy Carpenter, suggested the tough renewal season at 1.1, which saw reinsurers push through big price increases and overhaul terms and conditions, gives an opportunity for reinsurance buyers to now assess their own products.

The executive noted that the average attachment point in Guy Carpenter’s North American cat portfolio went up 60 percent at January 1, which she described as “a generational shift”.

“Now clients have to take that away, assess what they were able to buy, what it costs and what they think the trajectory of the market is going to be going forward,” said Mowery. “Then they have to go back and say, ‘Are we offering the right product on the front end? What do our attachment points need to be? What does our pricing need to be? And then you get the primary changes starting to filter through, which feeds the entire cycle.”

She added: “But those primary changes have in a lot of cases not taken place to the extent needed to support what reinsurers need to make those numbers.”

Pension funds scared away

The roundtable participants also noted that the type of capital investing in the industry has changed.

Ariel Re’s Mather commented: “A few years ago, it was mostly pension fund money and that had certain risk return characteristics and return hurdles. It might have been single digits. But we frightened that money away.

“Now, in order to capitalize our industry, you have to bring in more expensive capital, which is private equity, maybe hedge fund capital, and that's not expecting single digit, that's expecting numbers that begin with a two. In order to make the numbers work, we need the rate increases in order to then attract the lower return capital back. So it's going to be cyclical.”

Responding to one panellist’s suggestion that private equity is opportunistic, Mather replied: “I don't think it's opportunistic, I think it's more understanding capital. Capital that really understands risk.”

Convex’s Catlin suggested that private equity is now more convenient compared to the public markets, and the reporting to the market and explaining to multiple shareholders and analysts that comes with it.

“Every year got more and more intrusive and every year it got more difficult to talk to analysts,” the veteran executive said of his time running Catlin when it was public. “Whereas in private equity, there's some very serious brains in there nowadays. I think that's good for the industry actually.”

Catlin said he hoped others do what Convex did by launching with capital that had a ten-year horizon, because he said “five year capital is hard because it leads to short-term thinking”.

He also noted that in recent years an increasingly available option is to go through a continuation fund in which the manager of an existing fund sets up a new vehicle and rolls the asset from the existing vehicle into the new one.

While some panellists suggested the hard market will last for a while, Ariel Re’s Mather warned against oversimplifying when describing the market.

“I think we mischaracterize the market in a very lazy way,” he said. “We talk about it being a hard market. But there are real pockets of softness. There's a whole spectrum - there's very expensive and there's very cheap. And I would say the majority of the reinsurance market is still relatively cheap.”

Discussing the then-upcoming Japan renewals, the executive noted one example: “We're about to have to renew the biggest reinsurance contract in the world where most of the limit is sort of in the one-point-something on line. I don't quite get that.”

This is the second of two articles from the roundtable of leading executives that The Insurer held in association with AdvantageGo in Bermuda last month. You can read the first part, in which the panelists reflected on a grueling renewal season at 1.1 and expressed hope that the rest of the year would be somewhat calmer, here.

At the event - hosted in association with AdvantageGo – Stephen Catlin, executive chairman of Convex, said: “I've never seen anything like it in my life. You've got all these different factors going on and we as an industry collectively have an opportunity through all this turmoil to get products that are understood by the brokers, dare I say it by the carriers, and certainly by the policyholder.”