Charman: Reinsurance market to be challenging for foreseeable future

John Charman, CEO of Bermuda-based re/insurer Endurance Specialty Holdings, expects challenging reinsurance market conditions to last for the foreseeable future, but believes Endurance’s strategy positions it to navigate through it.

It’s always interesting to see what John Charman has to say about the market given his experience and long-standing as a leader in the global reinsurance industry. During Endurance’s recent third-quarter earnings call Charman explained how he and his firm see the challenges facing them and how Endurance is responding to them, as well as what strategies the firm is employing to allow it to grow in the competitive environment.

Charman noted the competitive state of the insurance and reinsurance markets:

“Competitive pressures in the third quarter intensified across most classes of business, with a greater concentration in the short tail lines as industry profitability remains relatively strong and industry capital is plentiful.”

He went on to discuss pricing and the conditions Endurance sees in the areas of the market it operates in:

“Our views on pricing are largely unchanged from last quarter and the pricing environment is unfolding as we thought it would. Smaller casualty products continue to show positive rate changes of up to 5%, while professional liability prices remain generally flat. Property and short tail rates continue to experience the largest pricing pressure, as losses have been relatively benign.

“Reinsurance conditions remain much more competitive than insurance with short tail and catastrophe exposures facing the majority of pricing pressures. Longer tail reinsurance lines, while less competitive, continue to experience some margin compression from expanded ceding commissions and terms.”

He then explained that the competitive environment and pressured market is likely to persist but believes some strategies will cope better than other:

“We anticipate these challenging market conditions will persist for the foreseeable future. We believe those companies that focus on providing valued specialty market expertise, in non-commoditised lines of business, will fare better.”

Endurance can differentiate itself by moving beyond price and leveraging its expertise and reach:

“While many other companies may be solely competing on price, it is gratifying that we can rely on the quality of our underwriters and the value they bring to their customers and broker distribution networks to generate attractive business.”

Charman explained some of the efforts Endurance has taken to enable it to better navigate the challenging market:

“Pricing within reinsurance continues to be competitive but we have deliberately rebalanced and re-underwritten our portfolio to maximise our profit potential.”

“We have meaningfully expanded our specialty business, while shrinking lines where the risk reward characteristics have moved away from us.”

Given the continued growth in premiums at Endurance and the fact that a lot of this is not longstanding business or clients that Endurance knows well, Charman said the reinsurer continues to ensure it is well protected:

“We are mindful of the current market environment, as well as the inherent potential volatility in new books of business that are not yet mature. With this in mind, we have purchased significant amounts of proportional reinsurance and retrocessional protection at both the line of business as well as aggregate level.”

This may cause a drag on earnings potential for the reinsurer but the effects will taper, Charman said:

“While this slows our net premium growth we feel it is the prudent approach, as it helps us build a profitable net portfolio of business that is balanced and maintains desirable risk return characteristics.”

Reiterating the importance of being well protected while targeting new accounts, Charman again explained why Endurance is buying more reinsurance and retro for itself:

“Our reinsurance partners provide continuous strong capacity and flexibility which allows us to safely expand our underwriting platform for the benefit of our shareholders. As we mentioned earlier, these reinsurance purchases should begin to stabilise resulting in increasing net premium growth potential next year.”

It’s interesting that at a time when many insurance and some reinsurance companies have been buying less protection for themselves, retaining more of the net premiums, Endurance is not. Whether that is akin to an arbitrage play, underwriting more risk and laying it off at cheaper reinsurance rates, it does allow Endurance to more safely protect itself from unexpected losses from new business acquisition and growth.

Endurance too is actively trying to make itself more efficient and to control its expenses. As we wrote last week, reinsurers expense management and efficiency is key in the currently challenging marketplace. Endurance is working to control its expenses, something that the failed Aspen deal had not helped this year, and is making progress.

In fact Charman hopes that adding efficiencies to the Endurance business will improve its outlook:

“We will continue to drive efficiencies throughout our operations. Our G&A expenses are already levelling off and as our business grows over the next several years we expect our increased efficiency to positively impact our margins.”

So Endurance is growing (gross premiums are up), buying more protection (net premiums are down but less than the increased gross), while managing its expenses and efficiency. A soft market strategy that may prove to be a good way to maintain the reinsurers capital and prevent it becoming more exposed.

Whether it’s the right strategy may only become clear when industry-wide losses strike or the market turns in some way. If the market does remain challenging, as Charman expects, then this strategy may stick for some time. It’s a different strategy to some other reinsurers so it will be interesting to see how they all fare through 2015 once the renewals have sunk in.