XL Catlin expects $50m savings on ceded reinsurance purchases

by Artemis on May 29, 2015

One area where reinsurance companies undergoing mergers or acquisitions (M&A) can expect to find savings and cost efficiencies, is through their ceded reinsurance purchases. Case in point, XL Catlin said yesterday it hopes to save $50m on its reinsurance costs.

With cost efficiencies one of the key focuses that analysts and shareholders alike place on reinsurance mergers, XL Catlin yesterday discussed where savings are likely to be made.

On the top line of the business, XL Catlin does not currently see any indication that it has lost any business by combining the two re/insurers. Additionally, CEO Mike McGavick said that the larger firm is already generating new opportunities, which he expects will continue and help the firm to grow.

Both new and existing clients are constantly offering XL Catlin new opportunities, McGavick said, “We simply weren’t being offered them before,” he added.

There are no guarantees around the top line, McGavick explained to analysts and investors, as current insurance and reinsurance market conditions mean that pricing is pressured, which he said is a “wild card.” That could lead XL Catlin to walk away from some business, so it’s difficult for the firm to make any guarantees.

Overall XL Catlin expects to make around $250m of savings. One of the areas where a significant proportion of the expected savings will be made is in ceded reinsurance purchases. By combining the two firms books and buying reinsurance and retrocession across the group, ceding commissions and ultimately the amount spent on reinsurance can be reduced.

Peter Porrino, XL Catlin’s CFO, said that reinsurance purchasing and ceded reinsurance is really complicated and difficult to say exact savings that will be made.

“We’ve done a lot of analysis looking at all of our treaties, looking at new ones and old ones, looking to change treaties at Jan 1, and I expect less treaties than we had this year,” Porrino explained.

Porrino continued, saying that it’s; “Hard to come up with a solid number but we would estimate $50 million for next year, 2016.”

Porrino explained that the $50m is the expected bottom-line reinsurance cost savings that XL Catlin will make. This saving will be generated by buying reinsurance differently and cutting number of treaties bought and premiums ceded, in some areas, as well.

On the reinsurance renewals that are currently in progress, XL Catlin has been seeing flatter pricing than it had come to expect over the last couple of years. That reflects other experiences in the run-up to the key June reinsurance renewals, with an expectation that price declines will moderate somewhat.

However, Porrino explained that the general market movements seen at these reinsurance renewals is one of further price declines, with the scale of the declines dependent on geography.

No mention of how XL Catlin’s third-party and ILS capital activities will be brought together were made during the analysts call, so we’ll have to wait and see how its broader ILS offering and greater opportunities for capital markets investors are put to good use.

Of course the issue for the market with lower ceded reinsurance costs for merging firms, is that it takes premium out of the marketplace.

At a time when competition in reinsurance is higher than ever, while firm’s are merging to gain scale which can move them up the food chain and make them stronger competitors, those same merged firms are going to cede less risk in future as well.

That’s another pressure for the specialist reinsurance players, particularly those focused on catastrophe risks. Greater competition in the open market from larger players and less opportunity to pick up what risk is ceded out of them. As M&A picks up this could add to the pressure for some companies.

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