Neon pulls out of property treaty, cites retro price mismatch issues

Neon Underwriting, the specialty insurance and reinsurance operation that is part of American Financial Group, Inc., has confirmed that it is pulling back from all property treaty reinsurance underwriting, citing a mismatch in pricing between retrocession and its inwards business.

At the same time Neon said it is to shutter its Bermuda platform operations and re-focus its remaining property insurance underwriting business in London.

Neon said that property treaty reinsurance won’t be underwritten from Jan 2020, saying that, “Over the past three years we have been incredibly proud of the traction and commitment to service that our Property Reinsurance underwriters in both London and Bermuda have brought. Whilst we had suffered some significant catastrophe losses in these books of business in 2017 & 2018, they were within our reinsurance/retro programme and below a number of our market peers.”

The losses are not the reason for the shuttering of this aspect of the Neon platform though, rather it is related to reduced profitability expectations due to retro market conditions, it seems.

“However, with the significant hardening of retro pricing exceeding the pricing expectations of the inwards reinsurance business and to keep within the constraints of our risk appetite we, along with our parent, AFG, do not believe that the property treaty class of business can provide a sustainable and appropriate risk/reward balance for Neon,” the company further explained.

We wrote about this current market dynamic just earlier today, that the cost of retrocession and lack of available aggregate or earnings protection coverage could hurt some reinsurers ability to maintain premium growth targets.

Neon has made an early move in confirming that, as traditional reinsurance pricing is not yet showing signs of keeping up with the pace of rate hikes expected in retrocession, it believes the business will be less profitable in 2020 and therefore less appealing for its platform and business model.

Market participants have increasingly been expressing dismay at the way primary insurance rates are firming in many areas, while retrocession is becoming increasingly expensive, but traditional reinsurance (in the middle) is not yet showing signs of keeping pace with either end.

For those that have relied on retrocession in recent years, it can make the underwriting of, in-particular, catastrophe exposed treaty business less appealing (cost-effective), unless they themselves have a lower cost-of-capital or some other platform efficiencies to benefit from.

Neon further explained what this means for its business, “As a consequence of our exit from property treaty, Neon will re-focus its Global Property and Property Binders business in London, resulting in the closure of Neon’s Bermuda platform. This decision has not been taken lightly. Our Property D&F team in Bermuda are held in the highest regard, and have made a significant contribution to Neon over the last three years.”

The company said that there will be personnel impacts in both Bermuda and London as a result of the changes, with details yet to be finalised.

Neon’s experienced underwriting team will no doubt find new homes, but it’s a further sign that without scale it can be hard to participate in the treaty market without adequate access to retrocession, or a way to generate the necessary business model efficiencies.

It’s also a further sign of the importance of retrocession as a form of capital these days in reinsurance. Which given the impending renewal and crunch of capacity, in particular aggregate retro product-related, may become even more evident over the next few weeks.

Neon said its parent platform AFG remains supportive, saying, “AFG continues to support Neon and the Lloyd’s platform and believes that Neon can make a profitable contribution to AFG’s results. AFG remains open to new opportunities and the identification of new classes of profitable business.”

Of course Neon is also the sponsor of the first UK domiciled insurance-linked securities sidecar-like vehicle, which last renewed as a $77 million issuance of notes from its NCM Re (UK PCC) Ltd vehicle at the Jan 2019 renewal.

The NCM Re sidecar vehicle entered into collateralised quota shares with Neon’s Syndicate 2468, taking a share of its property treaty reinsurance, as well as direct and facultative portfolios.

It’s not clear whether NCM Re will continue to be utilised at this time.

The fact Neon’s ILS vehicle had been focused on treaty, as well as other risks, could mean it is harder to raise capital for looking to 2020 given the last-minute shuttering of the treaty reinsurance underwriting operations.

It could, of course, pivot to solely taking a quota share of the D&F and facultative property insurance book underwritten by Neon, but that is a very different prospect for investors and may take some time to implement.

Or it could even become a third-party capital focused treaty play for the company, if it chose to pursue that and the cost-of-capital proved efficient enough.

However this plays out, Neon may not be the last company to find certain areas of treaty reinsurance less than economical based on the retro prices they may now have to pay. A dynamic that is going to play out over the coming weeks and could result in some market disruption it seems.