Efficient reinsurance helps Fairfax mitigate OdysseyRe cat loss impact

Fairfax Financial Holdings Limited, the parent company of specialty insurer and reinsurer OdysseyRe, in its Q3 earnings release, has highlighted the benefits that efficient reinsurance capital provides in mitigating the impact of catastrophe losses on OdysseyRe’s operations.

With the reinsurance market under significant pressure from a series of headwinds that continues to dampen pricing, buyers have been able to take advantage of favourable rates and terms in order to secure efficient coverage.

The resulting buyers market, which is expected to persist for the remainder of 2016 and into 2017 absent a market-turning event, has seen reinsurers start to push-back in an effort to limit any further rate declines but, for cedents there remains opportunity to secure efficient reinsurance protection.

In its third-quarter 2016 earnings release, Fairfax Financial Holdings Limited (Fairfax) revealed that it took advantage of the abundance of efficient reinsurance capital to support the operations of its specialty insurer and reinsurer, OdysseyRe.

During Q3 OdysseyRe wrote $499 million of net premiums, a decrease of roughly 1.9%, which, Fairfax explains “reflects the impact of additional purchases of property catastrophe excess of loss reinsurance at favourable pricing, which will significantly mitigate the impact of small to medium-sized catastrophe events on OdysseyRe’s U.S. and international operations.”

Favourable reinsurance pricing has been noted by a number of cedents during the softening marketplace, and is a result of the intense competition across the majority of business lines from both traditional and alternative sources, particularly in the property catastrophe space.

So while reinsurers are fighting for a seemingly shrinking share of the market, industry participants that utilise reinsurance are able to secure, in some cases, increased coverage for a cheaper cost than previously, underlining the benefits an effective reinsurance programme can bring to cedents in challenging market times.

In recent years catastrophe losses have been relatively benign for the sector, but this trend has reversed somewhat in 2016 after a number of events, such as the wildfire in Canada, hurricane Matthew, earthquakes in Japan and Ecuador, and intense storms in the U.S. and elsewhere.

The ability for cedents to purchase additional reinsurance protection at favourable pricing, at a time when catastrophe losses are increasing and reserves are reportedly running thin across the sector, is vital in navigating the softening market cycle where returns on the investment and underwriting side of the balance sheet are diminishing.

OdysseyRe’s combined ratio in the third-quarter of 2016 improved to 89.5%, while its combined ratio for the first nine months of the year weakened to 91.4%. At the same time, its underwriting profit fell to $58.5 million in Q3 and $132.9 million for the first nine months of the year, which the firm says is a result of “lower writings of higher margin property catastrophe business, continue rate pressure and lower net favourable prior year reserve development.”

Times are clearly challenging for insurers and reinsurers, but the softening, competitive landscape does provide cedents with an opportunity to secure efficient reinsurance coverage to help manage the troubling times.

With rates expected to remain pressured at the key 1/1 2017 renewal season, it will be interesting to see how far reinsurance companies push-back and whether cedents will be continue to take advantage of favourable pricing and terms.

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