Michael D. Price, President and Chief Executive Officer of reinsurance group Platinum Underwriters Holdings, said that as interest rates look increasingly likely to remain low he believes that the reinsurance market will remain “flooded with capacity.”
Price commented during the reinsurers third-quarter earnings call last week that low interest rates are stimulating capital flow into new asset classes and that insurance-linked securities (ILS) has been one of the beneficiaries of this trend.
“The low overall level of interest rates encourages people to stretch to find investment opportunities that provide potential for higher returns and that has contributed to capital flowing into our space,” Price explained.
Price is clearly in the camp who believe that low interest rates have driven a significant proportion of the third-party capital increase into ILS over the last couple of years. Of course, low rates across much of the financial market are a factor, but as we’ve written many times before the qualities of the ILS asset class are perhaps the biggest driver of investor interest according to asset managers and investors we speak to.
“It has supported the insurance-linked securities market, it has encouraged people to assume cat risk, which it sees as a non-accumulating, or diversifying, investment with return potential that exceeds what people can get in traditional fixed income,” he continued.
Price sees no sign of the capital excess in the reinsurance market letting up, saying; “To the extent that we have persistent low interest rates, I think it suggests that our space is going to remain flooded with capacity.”
“Low interest rates may very well persist, because global economic activity is slow particularly in developed countries, so I don’t anticipate that the recent direction of interest rate movements is in any way helpful to prospective returns in our space,” Price continued.
Despite the flow of new capital from third-party investors into the reinsurance space, as well as the high levels of traditional reinsurance capital being accumulated by reinsurers due to low catastrophe losses and favourable prior year development, Platinum continued to see reasonable results on its catastrophe exposed property book.
“Results on catastrophe exposed business have been relatively good and capacity has continued to flow into the sector,” explained Price. “Due to the significant capital available to support catastrophe exposed risks, we anticipate continued downward pressure on pricing of this segment. For 2015, we expect to write a similar portfolio to the one currently in force.”
This suggests that Platinum feels that even after the significant price declines on property catastrophe reinsurance business in the last year or two, there are still profits to be made for the firm.
Price said that the casualty market should also expect continued downward pressure on rates due to excess capital and interest in this line of business as well. “Capacity in the casualty market remains abundant and we anticipate continued downward pressure on risk-adjusted profitability for the segment,” he commented.
Platinum continues to put profitability ahead of market share, Price said, but will attempt to maintain its position on the most attractively priced business available to it at renewals.
“We will seek to find the best business available. But in the face of overall widespread downward pressure it would be reasonable to conclude that our portfolio, as well as the industry’s portfolio generally, is headed down as far as expected returns go,” Price responded to a question from analysts during the call.
Price agreed that this strategy is largely an exercise in remaining relevant in the market, while not over-exposing Platinum to reduced reinsurance rates. So underwriting a large enough book of reinsurance business to maintain profits and to continue growing capital, without over-exposing the company or taking on too much risk.
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