Evan Greenberg, CEO of ACE Limited, one of the world’s largest multiline property casualty insurance and reinsurance groups, said the firm was prepared to shed business in order to maintain profit in the softening market.
Greenberg made these comments in ACE’s fourth quarter earning call and it’s expected that other reinsurers will follow suit, choosing to pull back from more unprofitable lines of business in order to ensure its reinsurance segment remains profitable.
Not all companies have the luxury of being as multiline or having insurance as well as reinsurance to deploy capital as ACE, which could leave some in the more difficult position of having to find new opportunities that they are not already as specialised in.
As rates continue to soften across reinsurance, particularly in U.S. and global property catastrophe, reinsurers are going to need to address a reduction in profit and higher competition. The choices seem to be to either; move into more profitable lines, something that requires expertise and underwriting knowledge; to leverage lower-cost sources of capital including from third-parties and ILS; to simply reduce the amount of business underwritten or to return excess capital to shareholders.
ACE has got all these options at its disposal. It already operates across a broad swathe of the reinsurance and insurance business, it has third-party capital at work within its Altair sidecar, Greenberg said the firm will shed business it deems unprofitable and it has the option of buying back shares as well.
Greenberg said on the earnings call; “Given the soft conditions in the reinsurance market, which is awash with capital, global reinsurance is not going to be the place where ACE expects to achieve near-term growth.”
Shedding business that is unprofitable in the current market environment is clearly on ACE’s agenda, perhaps it is more than happy to let ILS, lower-cost capital or highly competitive, more focused reinsurers take this slice of the pie.
Greenberg commented; “We are fully prepared to shed further volume as necessary in order to maintain an underwriting profit. We take great pride in the underwriting discipline of our reinsurance colleagues.”
ACE is also benefitting from the reduced cost of reinsurance, said Greenberg; “The softening reinsurance market benefits ACE in terms of pricing and improved terms and that will positively impact our future financial results.”
In the fourth-quarter ACE reduced its net reinsurance premiums written by 3% as it worked to maintain profitability in the face of declining rates and increased competition.
While it is clear that many firms will pull back from business deemed unprofitable in the current rate environment, how long that can be maintained as a strategy is not certain.
For ACE a more concerted move into new lines of business and more focus on its insurance segment is likely during 2014, and beyond, if the reinsurance rate environment persists. But for the more property catastrophe focused reinsurance players the question will be how long they can continue to maintain profits, or hold onto excess capital, while rates soften and competition from more efficient markets persists.
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