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Insurance Hard Market “it is happening”


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The CEO of WR Berkley has the (insurance) quote of the year already. WRB posted results today; i find they have been a good source of information as to what is happening in the insurance market. Yes they can be promotional; but they are usually pretty accurate. When beginning his prepared remarks the CEO simply said “it is happening, ex workers comp”. https://ir.berkley.com/home/default.aspx (scroll down for webcast)

 

An insurance hard market is very good news for Fairfax. While this likely means we will not see meaningful share buybacks we should see solid top line growth in 2020. And as this progresses hopefully an improving CR. If their reserving hangs in there we should see solid results in Q4 (as investments did very well in Q4). We will find out in mid Feb when they report :-)

 

Here are a few notes from the WRB call.

- hard market being driven by three factors: low interest rates, increased frequency of cat activity and social inflation. Not just being talked about; now being acted upon. Very visible in Q4. Not slowing down.

- seeing acceleration in the top line

- all lines, ex workers comp, are increasing

- average increase on rate is 9% (ex workers comp)

- focus has been rate; shifting to count

- pricing new business 4.2% higher than renewal (not buying new business)

- renewal retention is about 80% (customers are not moving in spite of rate increases)

- reserve releases are shrinking (still positive but just)

- investment income is lumpy

- will see elevated spending on technology (systems, data, analytics) which will hit expenses a little

 

Question: “margin expansion - are we there yet?”

Answer: “2H ‘20 should see earned premium accelerate. Price increases are a couple hundred basis points in excess of loss trend estimates”

 

Question: “how long will it last?”

Answer: “lots more pain to come (those who have been underpricing); don’t see it slowing; see it accelerating”

 

Question: “when will shareholders see the benefit? Will it be higher CR (soon) or positive reserve development (years later)

Answer: “as year comes in should see better CR”

 

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Well enough insurance companies have reported that it is pretty clear that insurance pricing is ‘hardening’, even though most do not want to call it a ‘hard market’ yet. What is encouraging is:

1.) price increases in Q4 are accelerating.

2.) increases are spreading to more lines.

3.) no end in sight.

 

Here is what Chubb had to say in their earnings release tonight:

“P&C net premiums written in the quarter grew 9.8% in constant dollars, supported by a pricing and underwriting environment that continues to improve, with rates increasing at an accelerated pace quarter on quarter while spreading to more classes of business, risk types and countries. From what we have seen so far in ’20, this trend is continuing.

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Interesting thanks. Any thoughts on the excess capital and ILS that's contributed to soft pricing in the past? Has this dissipated? Is the capital still flowing but investors are just getting more cautious?

 

No, i not have any insight there (and am not an insurance expert :-) So i listen to a few of the conference calls to get better insight into what is going on. The WR Berkely CEO said the hard market was being driven by three factors: low interest rates, increased frequency of cat activity and social inflation. I have also read that Lloyds has made some changes that has shrunk capacity. Perhaps these factors in aggregate are larger in size to excess capital coming in. RBC is now calling for pricing to remain hard for all of 2020 and likely into 2021 as well. I am looking forward to seeing what kind of growth Fairfax is getting and to hear from their CEO, who is a pretty straight shooter.

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^There is clearly sustained hardening in some lines but some describe divergent trends and the question "How long will it last?" remains.

 

For the impact of alternative capital, best to look at the reinsurance side. The flow of capital has eased which helps to explain the change in sentiment and pricing but the effect is uneven across different lines. See the following two links, pages 13-14 of the second downloadable link.

https://www.reinsurancene.ws/total-reinsurance-capital-hit-record-625bn-high-in-2019/

https://www.willistowerswatson.com/en-gb/Insights/2020/01/willis-re-1st-view-january-2020-markets-diverge

 

Overall, there has been a readjustment of the risk-reward equation in the alternative market but spreads continue to be relatively low (IMO), especially given where risk-free rates are.

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Has anyone explained the 'why'? It doesn't appear to be due to a pick up in catastrophes scaring capital from the markets. Also doesn't appear to be because of a withdrawal of insurance linked products from securitization. So is it as simple as insurance companies acting with discipline to collectively raise premiums to make decent ROEs?

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I think one of the drivers is Commercial Auto. It's a significant piece of the U.S. market and has been losing lots of money across the board. Even the specialists are struggling. Significant, across the board, price increases are happening, starting in 2018, increasing in 2019, and continuing today.

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Has anyone explained the 'why'? It doesn't appear to be due to a pick up in catastrophes scaring capital from the markets. Also doesn't appear to be because of a withdrawal of insurance linked products from securitization. So is it as simple as insurance companies acting with discipline to collectively raise premiums to make decent ROEs?

 

Here is what the CEO of Chubb had to say:

"On pricing, I think, it endures. The fundamentals speak to it. And so the environment we see is the environment I imagine and will continue for some time, it's rational. And there are many reasons for it. And there is nothing that I see that tells me the momentum will slow. If anything, it's picked up, and it is spreading more broadly. Industry needs rate and needs it in quite a number of classes and across the globe.

 

And then you're in a low interest rate environment and you can hardly rely on investment income to bail you out. And the industry needs rate because rate has just not kept pace with loss cost trends for quite a number of years. The math is so simple. People seem to over intellectualize this.

 

And then on the other side of the coin, in the numerator, there are a few discrete classes where the loss environment is more hostile, and that is out there. That is understood. That is known and you either recognized it and reflected it in your reserves and in your loss picks and pricing in the past come, or it's something that you're doing with currently and is in front of you. But I think that just varies by organization."

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Has anyone explained the 'why'? It doesn't appear to be due to a pick up in catastrophes scaring capital from the markets. Also doesn't appear to be because of a withdrawal of insurance linked products from securitization. So is it as simple as insurance companies acting with discipline to collectively raise premiums to make decent ROEs?

 

Here is what the CEO of Chubb had to say:

"On pricing, I think, it endures. The fundamentals speak to it. And so the environment we see is the environment I imagine and will continue for some time, it's rational. And there are many reasons for it. And there is nothing that I see that tells me the momentum will slow. If anything, it's picked up, and it is spreading more broadly. Industry needs rate and needs it in quite a number of classes and across the globe.

 

And then you're in a low interest rate environment and you can hardly rely on investment income to bail you out. And the industry needs rate because rate has just not kept pace with loss cost trends for quite a number of years. The math is so simple. People seem to over intellectualize this.

 

And then on the other side of the coin, in the numerator, there are a few discrete classes where the loss environment is more hostile, and that is out there. That is understood. That is known and you either recognized it and reflected it in your reserves and in your loss picks and pricing in the past come, or it's something that you're doing with currently and is in front of you. But I think that just varies by organization."

 

I mean, I guess I'm just skeptical. Interest have been excessively low for years. Capital has flooded into the industry and driven down pricing for years. Insurers have made subpar ROE for years and didn't raise pricing.

 

Neither of those have changed, but I'm expected to believe that industry players who priced insurance too low to make a decent ROE for the past several years have suddenly all had a come to Jesus at the same time and raised pricing? Why wouldn't they have done this in 2016/2017 instead of waiting until 2020 of this was truly the case?

 

I'd be very excited for Fairfax if this was, in fact, the case. But having a hard time believing we're in a sustainable pricing environment because I can't explain why they weren't doing this years ago when the industry dynamic doesn't appear to have changed much.

 

I thought most hard markets occurred when capital fled the industry. It seems odd to expect that it just happening now simply because company's collectively raised premiums.

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I mean, I guess I'm just skeptical. Interest have been excessively low for years. Capital has flooded into the industry and driven down pricing for years. Insurers have made subpar ROE for years and didn't raise pricing.

 

Neither of those have changed, but I'm expected to believe that industry players who priced insurance too low to make a decent ROE for the past several years have suddenly all had a come to Jesus at the same time and raised pricing? Why wouldn't they have done this in 2016/2017 instead of waiting until 2020 of this was truly the case?

 

I'd be very excited for Fairfax if this was, in fact, the case. But having a hard time believing we're in a sustainable pricing environment because I can't explain why they weren't doing this years ago when the industry dynamic doesn't appear to have changed much.

 

I thought most hard markets occurred when capital fled the industry. It seems odd to expect that it just happening now simply because company's collectively raised premiums.

 

Sounds similar to what happened in the airline industry in recent years.  They all stopped competing so hard on price and rationalized their fleets.  Now the real question is how long will it last?

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Maybe, in the past few years, insurers were hoping for higher interest rates as the economy recovers, but have now realized rates will stay lower for longer..

 

I think part of airline rationalization is a result of consolidation, whereas insurance is still very fragmented.

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Some comments from Markel's Richie Whitt:

 

"As for market conditions, the themes that mentioning throughout the year continued in the fourth quarter and during the important January 1 renewals. Market conditions continue to improve in an incremental fashion. We continue to see month over month pricing improvement in almost all lines. It's clear that the market continues to transition with carriers reassessing their expectations for CAT frequency and severity and professional and casualty claims trends creating uncertainty. January one renewals continued the trend of gradual price improvement. As has been noted by others, there were some disappointment around property reinsurance rate increases at this renewal. Our sense is that the Japanese renewals at April 1 and the Florida renewals at June 1 will tell us much more about the health of price momentum in the reinsurance market. We are optimistic that this incremental rating environment improvement will continue during 2020.

 

..... The reunderwriting that's been taking place at a number of organizations over the last 12 to 24 months is clearly driving business into the E&S markets you've probably seen the reports about the activity in the stamping offices being up large numbers 20%-plus in some cases. So, there is no doubt there is a realignment readjustment going on in the market. I'm still not going to call it a hard market. But it's certainly a much more favorable market than we've seen in a long time. And yeah, as you would expect submission activity is up significantly. We are obviously growing very nicely. So, it's an exciting time. I have to say it's a lot of hard work for our underwriters right now because they are inundated. But I would say they're all very excited about it because history has proven you don't get these opportunities, but so often and when they happen, you need to. You need to take advantage of them, and I will say, I think we did a nice job. Our folks did a nice job of staying disciplined as the markets were going down such that we are in great position to take advantage of this market today. I feel really good about our opportunity."

 

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