Endurance focused on quality, not quantity reinsurance underwriting

by Artemis on February 22, 2016

Bermuda domiciled specialty P&C insurer and reinsurer Endurance Specialty Holdings Ltd. has a selective and focused approach to underwriting within its reinsurance segment, according to Chairman and Chief Executive Officer (CEO) John Charman.

In a highly competitive and overcapitalised reinsurance market discipline and efficiency have become key to maintaining industry relevance.

The benign loss environment, reserve releases and the availability of cheaper reinsurance capacity have resulted in profitable periods for some re/insurers, despite ongoing market headwinds.

However, when earnings and catastrophe losses return to more normalised levels, those that were truly disciplined during the softening phase stand a good chance of coming out on top, while those that weren’t risk prolonging market pressures, and ultimately lower returns.

During the company’s fourth quarter 2015 earnings call, Endurance Chairman and CEO John Charman, was questioned on the firm’s de-risking of its reinsurance book from property catastrophe lines while growing its property business within its insurance segment.

Property catastrophe lines have seen the steepest rate declines in recent months owing to the influx of alternative reinsurance capacity and the benign cat period, leading numerous reinsurers to pull-back on writing property cat business that is deemed to unprofitable.

“It’s a slight difference to de-risking,” said Charman, continuing to explain that the firm has actually made its reinsurance portfolio highly dedicated to cedents it feels have “high quality underwriting capability within those lines of business.”

“So what we have done is that we have actually made it much more focused and much more selective,” said Charman.

This suggests the firm is focused on quality underwriting rather than quantity, a sensible approach during a softening market.

The temptation to simply write more and more business for the sake of it, while the current market environment enables access to cheaper reinsurance capacity, in an effort to beat the competition, is a dangerous method, and could lead to overexposure when the market does start to turn or when the next large catastrophe event happens.

Endurance’s Q4 and full-year 2015 results show that the firm’s Q4 reinsurance gross written premiums (GWP) declined by 15.8% when compared to the previous year, pulling back on property cat lines during the period by $8.5 million, with competitive market conditions being cited as a reason for this.

However, for the entirety of last year Endurance’s reinsurance segment GWP increased by 4.8%, to $1.235 billion, suggesting that even with its “focused” and “selective” approach it was able to increase the amount of business it underwrote across its reinsurance operations.

Charman notes that its commitment to hiring “high quality leading market underwriters” over the last couple of years, that have experience writing international exposures for certain short-tail lines, gives them the capabilities to access “the better end of that business,” regardless of “how much pressure is on the global short-tail insurance marketplace.”

For its investors it should be welcomed news, as a disciplined approach in testing market times might well mean less profit in the short-term, despite the company’s full-year results proving otherwise, but will likely result in market longevity and the firm being well placed when the market does start to turn.

Furthermore, investors in Endurance’s investment management subsidiary Blue Capital and its managed funds, which it acquired following its takeover of reinsurer Montpelier Re in 2015, will likely also welcome the news of a disciplined, focused approach from its new holding company.

Charman stressed that the firm’s current, strong position heading into 2016 despite a range of market challenges, is due to taking steps two to three years back to mitigate the impacts of the now soft market.

“Our underwriting quality, risk selection and strong risk management remain critical in delivering differentiated performance we expect to achieve.

“I am firmly convinced that the path we are on to increase our scale and relevance while enhancing our market position and building market-leading capabilities, will lead to superior under-writing profitability and returns,” said Charman.

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