When Artemis last wrote about re/insurer Beazley plc, the firm said that alternative capital was both a positive and negative for it. The latest results show that Beazley’s opinion of ILS capital may have become more negative in the last half of the year.
London and Lloyd’s focused insurance and reinsurance business Beazley said before that it sees positive benefits from alternative capital and ILS, in its reinsurance buying, as well as negative impacts, in the price declines it had witnessed across the reinsurance lines it underwrites.
The negative seems to be outweighing the positive for Beazley, as in its fourth quarter results it revealed a scaling back of its reinsurance treaty business by 9% in 2014, which its CEO explained was “following a large influx of capital from pension funds that drove down premium rates.”
Of course, as most in reinsurance now appreciate, it is not just pension funds or insurance-linked securities (ILS) that is to blame for rates coming down, excess traditional capital is an equal part in this. However ILS investors have taken advantage of their lower cost-of-capital in order to capitalise on declining rates and win business from the traditional incumbents in this market environment.
It’s largely accepted that excess traditional reinsurance capacity is having an equally dramatic effect on premium rates as alternative capacity and it is the combined superabundance of reinsurance capital that is continuing to pressure rates. Some even suggest that ILS capital has actually been the more disciplined, citing traditional reinsurers desire to fight back as a key reason for expanded terms and cheaper pricing.
Chairman of Beazley Dennis Holt commented on the market; “In the past year there has been more talk about how the reinsurance market has too much capacity, rather than on the action needed to address the risks that this presents.”
Beazley’s pull-back from its reinsurance treaty business is a direct reaction to the over-capacity it sees in the reinsurance market, and the firm pulled back elsewhere as well, reflecting the other areas of the market most under pressure right now and where the pressure has reached into commercial and industrial insurance lines.
“However, Beazley has acted. Our reinsurance division underwrote 9% less in gross premium in 2014 than in 2013 and we will prune the book further in 2015. Other catastrophe-exposed accounts, such as our large commercial property insurance book in London and our energy insurance book, also shrank, by 12% and 18% respectively, last year,” Holt continued.
CEO Andrew Horton continued; “Competition for large risks, most of which we underwrite in London, was more intense, particularly for catastrophe exposed lines of business such as treaty reinsurance, commercial property and energy.”
Overall, Beazley reported renewal rates decreasing by 1% in property, 2% in political risk & contingency, 6% in marine and 10% in its reinsurance business.
However the firm’s reinsurance business was also assisted by lower than average losses. “Aided by lower than usual natural catastrophe activity, our reinsurance division achieved a combined ratio of 69% (2014: 49%) while experiencing significant rate pressure on renewal business. We have maintained our underwriting discipline and scaled back our catastrophe budget while continuing to develop a global presence for reinsurance business,” the firm explained.
And Beazley, like most other re/insurance businesses, sees no sign of the competitive pressure letting up.
The firms CUO Neil Maidment commented; “We anticipate the increasingly competitive market conditions in the large risk market to continue in 2015. The lower rates experienced in 2014 were driven by an over-capitalised reinsurance market and further encouraged by the relatively favourable natural catastrophe claims experience of the last 2-3 years.”
On the positive side, Beazley spent slightly less on reinsurance in 2014, at $289.1m, compared to $293.7m in 2013. The firm does not detail whether this includes a greater level of protection, however, given reinsurance rates have declined significantly it is safe to assume that having spent a similar amount Beazley will be much better protected after the 2014 spend.
In fact, CEO Horton called this a silver lining, saying; “The silver lining for the group as a whole was that the cost of our own reinsurance protections also fell.”
So, still positives for Beazley as well as the negatives. However the negatives perhaps seem to outweigh the positives a little and Beazley’s experience is a good example of how market conditions and the abundance of reinsurance capital are impacting re/insurers that focus on London and Lloyd’s business.