Current point in the cycle favors highest quality underwriters: Charman

It’s always interesting to listen to comments made by John Charman, CEO of Endurance Specialty Holdings, one of the larger reinsurers which is not, so far, meaningfully pursuing or promoting a third-party capital management or ILS focused division.

John Charman, a high-profile CEO in the reinsurance space, took over at Bermuda-based specialty provider of insurance and reinsurance products Endurance Specialty Holdings just as the alternative reinsurance capital inflows were reaching a peak. His approach to running the business has been telling, pulling back on reinsurance and putting more focus into specialty lines and insurance business, as Endurance seeks to find ways to profit without moving over to managing other people’s capital.

For Endurance, as a provider of both insurance and reinsurance products, all on the traditional side, the current market environment has been challenging but it has continued to produce reasonable results, partly due to its refusal to continue writing lines of business where rates have declined significantly.

Premiums written at Endurance are down on a year earlier, but that’s no surprise considering the shift in strategy and pull back on what were core reinsurance lines of business.

John Charman commented on the reinsurers quarterly results; “Endurance had a good quarter, both financially and strategically.  Financially, our strong operating results were driven by improved underwriting performance and positive investment returns.  Strategically, we have made significant progress driving substantial improvements in our underwriting capabilities, streamlining our operations and enhancing our positioning in the global market.  These strategies are accelerating.  We continue to attract market leading talent and these new high quality growth initiatives combined with our more streamlined operations significantly improves our ability to transform Endurance into a world-class underwriting organization with industry leading profitability.”

During the earnings call Charman discussed the strategic changes made at Endurance and also his current view on the market.

He said; “We have reset our culture with a greater emphasis on the long-term cycle management of our insurance portfolio. Our global insurance business is focused on achieving a greater risk-reward balance and we anticipate expanding partnerships with our reinsurers to support our expansion and optimisation of our net returns.”

So one area that Endurance will be able to take advantage of is better terms on reinsurance protection that would suggest. The firm has for two quarters now been working to optimise its portfolio and balance sheet with more effective use of reinsurance and retrocessional capacity. Of course some of this retrocessional capacity is likely what would be termed alternative or third-party sourced, as a good proportion of the retro market is today.

Charman said that the pricing environment continues to be mixed, with primary rates still seeing increases in many areas but with the rates of increase beginning to moderate. At the same time insurers are choosing to retain more of their exposures and pushing reinsurers for better terms and conditions.

Charman believes that reinsurers have not been benefitting fully from the rate increases in primary insurance. They have not been able to force through their own increases to mirror this, partly due to offering higher ceding commissions and expanded coverage which cuts into the margins.

In addition, Charman said, alternative reinsurance capital continues to case catastrophe risk, thus dampening the property catastrophe reinsurance market.

Charman said that as a result of this Endurance expects market conditions will remain neutral to challenging over the next few years, a definitely more somber and less bullish tone than in the last quarterly earnings call. However, he does see room for opportunity but only for the best in the business.

“We are at a point in the underwriting cycle that will increasingly favor the highest quality underwriters with the best products and most efficient infrastructures,” Charman commented.

That comment should apply to both traditional re/insurers and to the alternative reinsurance and ILS market as well. There has been a definite focus on building teams and infrastructure of late and it is likely this knowledge that market conditions may be challenging for some time to come which will drive investment in people and processes.

Charman continued; “Our strategy over the next several years will be driven by a relentless focus on improved underwriting, risk selection and portfolio management, while driving efficiency throughout of our operations.”

Charman expects to begin to see the positive impact of much of the strategic and transitional work undertaken at Endurance in the next quarter and beyond.

Traditional and non-traditional reinsurance capacity providers should take note of the Endurance example. Investment in people, process, facilities, technology and services at a time when the market is challenging can enable them to reap rewards as and when markets recover and become more manageable.

Of course, it will be telling to see how a re/insurer like Endurance, which is predominantly equity investment backed, competes over the longer term versus the new breed of ILS and third-party capital unit equipped reinsurers and of course the dedicated ILS specialists. We will need to look further ahead as the market continues to adapt to new forms and sources of capital and capacity to see exactly how this will pan out and companies like Endurance will fare.