Global multi-line property casualty insurance and reinsurance firm ACE Limited wants to be at the forefront, taking a leadership role, as the use of capital evolves in the changing reinsurance marketplace, Chairman and CEO Evan Greenberg said yesterday.
Greenberg discussed the changing market environment, which he noted as increasingly soft, as well as the way capital can be used on both sides of the re/insurer balance sheet, during ACE’s third-quarter earnings call yesterday.
Greenberg began by saying that he was pleased with the way his underwriters had responded to the difficult market in the last quarter, saying; “Given the competitive reinsurance market conditions, I’m pleased with the underwriting discipline shown by our reinsurance team.”
Commercial insurance markets have become “incrementally more competitive”, Greenberg said, but the underwriters at ACE continued to demonstrate that they are remaining disciplined and being selective in the risks assumed.
“We increased our submission and quote activity, while our quote-to-close ratio declined as we became more selective. To me that equals underwriting discipline,” Greenberg explained.
The market is growing more competitive and some parts of it are acting in a ferocious way, Greenberg continued, citing reinsurance as one example. However ACE is ready to take advantage of what is on offer to its reinsurance placements in the lower priced environment. “The fact is, we’re moving into a softer market,” Greenberg said.
Greenberg was asked about recent press reports which state that ACE is planning an innovative internal vehicle into which it would cede some its risks, with asset manager Blackrock working to help it raise capital and also to invest the assets more aggressively. Kind of a like a captive sidecar hedge fund reinsurance vehicle, to put all the buzz words into one sentence.
We’ve also heard some rumours that the vehicle could be funded by third-party capital, so allowing ACE to actually write more business, cede a portion into this internal captive (sidecar) vehicle, while giving it a chance to try out a more aggressive investment focus on the other side of this vehicle’s strategy. That could be particularly interesting, as a kind of sidecar with hedge fund reinsurer traits, but remains rumour at this time.
Greenberg would not be drawn, saying that he wouldn’t comment on rumours and speculation which have been published so far and that if there is anything to say ACE will be clear about. Instead of commenting directly on the rumours, Greenberg gave some insight into how he sees the reinsurance marketplace evolving and the opportunities that brings to do things a little differently, in terms of matching risk with capital and investment.
Greenberg said that the marrying of risk and capital with a hedge fund strategy on the investment side is something he sees as just a feature of the changing marketplace and the changing way that risk is being assumed and held.
To date, reinsurance has been a traditional model of buy and hold, where risk would be distributed from underwriters, managers of risk and primary companies to buy and hold pools of capital. This model is perhaps a little overdue an overhaul in Greenberg’s view and the recent trends witnessed in the market may be the start of that.
“I think that overtime, as has happened in other asset classes, that will evolve and evolve beyond that, and needs to evolve beyond that,” Greenberg explained. “Because the model constrains how much capacity there is to take on the values of risk that are being created around the world and values are increasing.”
He said that technology improvements, maths and IT will enable the industry to; “Evolve how we use and harness the capital around the world.”
What we are seeing in the insurance and reinsurance markets right now, with new capital, new business models, softening prices and a changing market cycle, could just be the start. According to Greenberg what we are seeing is; “Glimmers of early steps towards new kinds of buy-and-hold models, potentially, that are using other sources of capital.”
As part of this changing market, with the way risk is matched to capital with differing risk and return appetites evolving, it is natural that there are changes to the way the investment side of the re/insurance business operates as well.
Greenberg acknowledged as much in his comments; “If it’s a buy and hold, and it’s private and the purpose is long-term gain not simply annual income, then frankly the investments, while remaining conservative and appropriate to an insurance company, can evolve.”
He also suggested that as part of this market evolution the business model will change and risk originators will be able to access capital on their own, without the need for a wholesale marketplace in between. That suggests that Greenberg and ACE may be thinking that by keeping their vehicle internal they can cut out middlemen, self-reinsure (cutting out the traditional renewal cycle) and directly match their risk to new capital providers, while also experimenting to a degree on the asset side.
Greenberg suggested that he (and ACE) is ready to embrace whatever new opportunities come along thanks to the evolving insurance and reinsurance market environment, saying; “You can’t stand in the way of progress, and you can’t fight against that, if you think it has a sound premise, and that’s kind of my view of it.”
“ACE as a large company, as an originator of risk around the globe and with a good reputation for being able to earn a reasonable return on the risk it takes. We’ll necessarily be at the forefront and in a leadership role as these things evolve, if they make sense to us. It’s our job,” Greenberg said as he finished his comments on this topic.
So despite not commenting on the rumoured initiative Greenberg is clearly well-advanced in his thinking about how to embrace the changing market, leveraging new capital sources and new investment strategies, while also cutting out middlemen where possible. The end result would be a very efficient vehicle, with the potential to allow ACE to grow its business, share some of its good fortune with investors and juice up the asset side all at the same time.
It will be fascinating to watch how ACE’s plans, if indeed there are firm plans, develop. The fact that ACE want to be at the forefront and in a leadership role as the market evolves is to be commended. It’s preferable to be driving from the front as new and innovative opportunities emerge, rather than following from the rear after which the best opportunities may already have been taken, or it may simply be too late to take advantage of the market’s evolution.
Other recent articles on Evan Greenberg from ACE Limited: