WSJ - RE Insurance Hit by Cat Losses

[FairFacts]

Interesting article in the WSJ yesterday.

 

The gist of it is that loose monetary policy is opening up new ways for insurers to spread risk, pressurizing rates for the reinsurers.

 

"Reinsurers fared poorly in January during annual price-renewal negotiations with insurers, according to industry analysts, with easy money opening up new ways for insurers to spread risk beyond reinsurers, such as issuing bonds, pressuring prices."

 

Overall is this good or bad for Fairfax. On one hand it should cost less to reinsure for the inurance bussinesses which should be positive but negative for Odyssey's reinsurance business.

 

[Cigarbutt]

So, what is driving the cycle?

Following cycles can be mostly a retrospective exercise.

However, a lot of data suggest that the present market compares to the "great soft market" of the 1997-2001 period.

One of the underlying factors is the advent of significant alternative providers of cheap capital.

Some (eg Fitch) suggest that this may be a feature that will "smooth" the cycles, as it is felt that "efficient" capital market investors will help disperse and diversify the "risk".

Last year was a great example when insurers and especially reinsurers had to deal with extraordinary losses. However, many reinsurers were able shed some of the losses to the ILS market which capacity has been already replenished (and more) by institutional investors reaching for yield.

 

The answer to the question about this being a positive or a negative is related to an appreciation of the cycle and to what drives the cycle.

My take is that the last soft part of the cycle has been so far: very unusual in its intensity and duration, cheap capital has played an increasing role in maintaining a uniform psychology among providers which contributed to less discipline vs market share and cheap capital will not be a constant feature going forward.

 

At this point, for Fairfax (underwriting side of the business), I see them being very well positioned because of a stronger and more consistent underwriting discipline in the last few years, a relatively low NPW/capital and the incredibly high cash and liquid position on the left hand side of the balance sheet.

 

 

[FairFacts]

CB, good perspective I tend to agree that we should do well if the market starts to harden (IF)

[StubbleJumper]

Fairfax's underwriting has not been a problem at all for the past 5 years or so.  In 2016, they wrote a CR of 92.5, and last year they wrote 106.6 which included 13.7 points of cats.  Well, cats are a fact of life and you're gonna have them from time to time, but last year was one of those unusual years like 2004 when you get hammered with one after another.  You can never assume a cat-free year when you are penciling in a CR into your pro-forma statements for next year, but you can certainly pencil in 5 points instead of 14. 

 

If you go through the exercise and pencil in 5 points (or 6 or 7 if that's your preference), you end up with profitable underwriting.  If you accept Prem's observation that prices are firming up in response to last year's cats, it's pretty easy to come up with a CR estimate of 95 (or lower) for 2018.  This is particularly true if you hold the view that FFH tends to sandbag its reserve estimates, resulting in systematic favourable development.  If you hold that belief, then you might expect to see reserve releases from Allied for at least the 2017 accident year instead of the adverse development that hit the CR in 2017.

 

I'd say that the market is already pretty firm when FFH has every expectation of writing a 95 or lower.  U/W profit of $500m should be easy to obtain, and with a bit of luck on the cats, $1b would not be bat-shit crazy. 

 

They are well positioned.

 

 

SJ

[Cigarbutt]

http://www3.ambest.com/ambv/bestnews/presscontent.aspx?refnum=26205&altsrc=9

http://www.artemis.bm/blog/2018/02/06/alternative-capital-lost-in-2017-has-now-been-replaced-a-m-best/

 

Data about the evolving competitive landscape.

 

[Spekulatius]

Interesting article in the WSJ yesterday.

 

The gist of it is that loose monetary policy is opening up new ways for insurers to spread risk, pressurizing rates for the reinsurers.

 

"Reinsurers fared poorly in January during annual price-renewal negotiations with insurers, according to industry analysts, with easy money opening up new ways for insurers to spread risk beyond reinsurers, such as issuing bonds, pressuring prices."

 

Overall is this good or bad for Fairfax. On one hand it should cost less to reinsure for the inurance bussinesses which should be positive but negative for Odyssey's reinsurance business.

 

Yes, insurance linked securities (catastrophe bonds ) have been used by insurerers and even reinsurers to lay off risk. I do think it changes the dynamic of he insurance Markets, since they  basically allows dumb money to get into the insurance market faster. I do think it is dumb money that mostly is buying these, because I cannot imaging thst institutions or investment entities buying those know as much about the risk than the sellers. I don’t think it will smooth out the market either, the dumb money will rush in based on need (to generate income) or perceived risk and smart insurers will sell those to lay of risk., but I am guessing that dumb money will also rush out and sell those securities as well , probably at an inopportune time. So, I think these new instrument will shorten the hard/soft insurance cycle duration, but probably not reduce their severity.