Beazley see third-party reinsurance capital affecting growth of short-tail lines

Specialist insurance and reinsurance firm Beazley has cited the strong influx of non-traditional reinsurance capital into global reinsurance markets as a potentially negative factor, which could slow growth for certain lines of business it participates in over the months to come.

This morning Beazley announced its interim results for the first-half of 2013. The specialist insurance and reinsurance group, which includes operations across Europe, the U.S., Asia, Australasia and has five syndicates under its management at Lloyd’s, announced strong underwriting performance for the first-half despite an increasingly competitive market environment.

In the interim results statement, Beazley CEO Andrew Horton said that the strong influx of new non-traditional reinsurance capital into the global reinsurance markets was likely to slow growth in catastrophe exposed short-tail lines over the months ahead.

Beazley’s reinsurance operations are its fourth largest division, and account for 16% of its premiums, but the division saw rates slide by 1% over the first-half of the year. Horton noted, that despite reinsurance rates actually remaining near historic highs, the increased competition, some of which is third-party capital backed, meant that he expects growth in this area to be constrained. The large capital surplus within the reinsurance sector will keep growth opportunities to a minimum here in the absence of any significant losses.

Beazley is the first of the major London listed re/insurers to report first-half results. It’s expected that similar sentiment will come from other major players in the market, with the impact of third-party capital likely a concern for most (to some degree).

Andrew Horton commented; “Beazley delivered a strong underwriting result in the first half of the year. Gross premiums written grew by 5% and we achieved a combined ratio of 89% despite increasing competition in a number of classes of business. Investment returns were down due to mark to market losses in our fixed income holdings caused by rising interest rates. Looking forward, however, higher interest rates promise enhanced investment returns.”

Horton explained where this increasing competition is coming from; “Capacity is likely to continue to be abundant for catastrophe reinsurance and for other short tail risks, particularly those that are heavily affected by the availability of catastrophe reinsurance. Changes in distribution are also occurring with a number of major brokers creating facilities that will also add to competition. But this is not an unfamiliar pattern and the spread and balance of our portfolio continue to insulate us to some extent from such pressures. We will maintain underwriting discipline in those lines that are becoming more competitive while continuing to identify and exploit growth opportunities in other areas.”

So it’s clear that the impact of third-party capital and alternative reinsurance capacity is on Beazley’s mind as it looks ahead to the rest of 2013. Also a worry for these large Lloyd’s players are the increased prominence of broker facilities which can also increase competition.

For re/insurers like Beazley the focus will surely be on growing lines of business where third-party capital has not yet had an impact. It seems like a good time for re/insurers to focus in on specialisms, building out talent to help them secure more of specific niche and profitable markets, and Beazley is targeting this with a number of recent hires.

The influx of non-traditional capital into the reinsurance market is sure to be cited by a number of these London-listed re/insurers over the weeks to come. Interestingly, despite Beazley’s results not being too bad at all for the first-half, the pessimistic outlook has certainly hit its share price which is currently down almost 7% today.