Endurance follows the strategic (opportunistic) reinsurance buying route

Bermuda-based re/insurance firm Endurance Specialty Holdings has made an increased use of strategic reinsurance buying to protect itself, optimise the return of both its insurance and reinsurance books and to mitigate competitive market conditions.

Whether considered strategic or opportunistic, re/insurers growing use of reinsurance and retrocession purchases in the current market environment are no surprise, allowing them to offset some risk they would rather not hold on their books, acquire protection at ever improving prices and to attempt to arbitrage the market (in some cases).

A number of reinsurers reporting second quarter 2014 results have revealed much larger retrocession purchases than in recent years, while primary insurers have been touting the much improved pricing, terms and conditions achieved at recent reinsurance renewals.

For Endurance, having both large insurance and reinsurance businesses, both are true and the firm has seemingly put considerable effort into the optimisation of the portfolio of risks it bears and the risks it hands off to others in the last quarter.

Endurance’s second quarter results show that the firm has continued on its mission to grow organically, increasing gross premium written considerably across both its insurance and reinsurance books. In fact the firm has grown its reinsurance gross premiums written by an impressive 24.4% over the same quarter a year earlier and by 6.5% for the first-half. In insurance gross premiums written are up by 16.1% for the quarter and 4.7% for the first-half.

Such strong growth would be hard to maintain without an increase in the use of reinsurance, to offset the risks held and to offload some to other capital sources. Endurance has shown evidence of an increasing reliance on reinsurance capital both in its primary insurance and its reinsurance business, with new buys of reinsurance and retrocession, according to its results.

On the primary insurance side, where Endurance grew its gross premiums, the net premiums actually declined as the firm upped its reinsurance buying, including adding a 10% global whole account quota share agreement as well as purchasing stop loss protection for its agriculture and crop insurance book.

Endurance said that the reinsurance purchase adds value because; “These increased reinsurance purchases improve the risk reward characteristics of our retained insurance portfolio and help mitigate the impact of the increasingly competitive market conditions we are facing.”

On the reinsurance side of its business, Endurance has grown its premiums written in specialty and professional lines, while pulling back in property and casualty lines of business. On the property and casualty side Endurance continued to non-renew and re-underwrite business which did not meet its return hurdles.

Again, on the net premiums side growth was slower as the firm took advantage of market conditions to purchase additional retrocessional reinsurance protection. Both proportional and aggregate excess of loss retrocessional purchases were increased in the quarter for Endurance’s catastrophe portfolio.

Again, Endurance said; “These strategic retrocessional purchases improve the risk and reward characteristics of our net reinsurance portfolio and help mitigate the impact of the increasingly competitive market conditions we are facing.”

Endurance is following the same strategy of a number of other re/insurers which have upped their use of reinsurance coverage in the last quarter as they seek to optimise the returns of their portfolio with strategic, or opportunistic, reinsurance and retrocession purchases.

It doesn’t actually matter whether you call these strategic or opportunistic, as the strategy here is to be opportunistic and take advantage of market conditions in order to achieve greater protection, lower probable maximum losses and to use reinsurance capital as a buffer allowing you to grow into new lines of business.

By maximising protection in its lines of business which are most exposed to losses and also to the competitive market, Endurance can leverage its capital more readily as it continues its strategy of moving to a truly specialty and diversified player. Reinsurance is one tool it has which can help it to reach this goal and judging by the results the use of reinsurance may be a key lever this year.

This year, retro in particular is being used increasingly by reinsurers as a capital management tool, allowing the reinsurer to effectively transfer some of its peak risks onto other parties, often third-party capital given the size of some investor backed retro markets now.

Another reinsurer, RenaissanceRe, said recently when reporting its results that it is aware when buying retro how the benefits of reducing its risks flows through to its excess capital position. However it also warned that buying more retro when not growing the top line premiums could be a dangerous strategy, as the match between de-risked capital and freed up excess is not always exact.

There is never a perfect match between retrocession purchased and an inwards reinsurance book written, warned RenRe, so think about retro purchasing as just one capital lever you have available.

For Endurance, given the top line growth in premiums written, the retro and reinsurance purchase growth will make a useful lever in 2014/15, particularly if it is faced with outsized losses. Even without losses, by de-risking itself, Endurance can effectively free up and better manage some of its capital. But with the addition of losses the retrocession and reinsurance purchases may end up looking like a much more intelligent strategy than purely opportunistic buying.