Property rates more than adequate this year. But casualty faces wall of investor interest: Beaton, Ark

While the hard market in property insurance and reinsurance has ended and the direction of travel for rates is generally down, Ian Beaton CEO of global specialty re/insurer Ark said he still feels there is rate adequacy this year and maybe into next. But, given the investor interest in casualty ILS, he was less certain on the outlook for those longer-tailed lines.

Beaton was speaking at the White Mountains investor day last Friday and provided an overview of the Ark insurance and reinsurance business and the market conditions it is facing.

On the property segment and property catastrophe risks, Beaton explained, “We’ve had a good run in the hard cycle, it’s been fantastic but now things are changing. It’s fundamentally different out there.

“About 46% of our business is property related and rates are softening fast, very fast. Rates are down about 11% in D&F and 14% in property treaty. This year we think profitability is still more than adequate, we think at those degrees of rate change the following year will be adequate.”

Later in response to a question, Beaton went into more detail, “There’s a direction of travel, that’s the rate change and then there’s an underlying margin or profitability and we still see this year as above our hurdle returns in terms of profitability. It’s not like the market is profitable, then bang it hits a wall and then its unprofitable. There’s a distribution of adequacy within your portfolio as individual programs, treaties or risks and as a portfolio.

“So you can change a couple of things, in terms of the shape of your portfolio and what you are writing and what you aren’t writing, but things are sliding towards less profitable across the portfolio.”

On what this might mean for investor interest in property catastrophe risks, in particular with reference to Ark’s own reinsurance sidecar structure, Beaton further stated that, “We still see it as more than adequate this year and we’d expect it to be adequate next year. So if investors share our return thresholds we’d expect some of those to still find that an attractive place to be.”

But one segment of the market Beaton seemed less assured of was casualty lines, where rates may have been rising but he feels structural pressure from weight of capital may also have an influence going forwards.

“Another uncertainty is whilst casualty continues to push up, there seems to be a wall of capital that’s interested in particular in casualty ILS, and that might mitigate against this continuing rate push upwards.

“There seems to be a lot of money interested in that sector. It’s not a huge sector for us, but it is nonetheless important for our industry,” Beaton said.

The growth of casualty quota share investment structures such as reinsurance sidecars and the proliferation of investor-led deals with casualty re/insurers and MGA’s could drive more discussion of rate adequacy in that market segment going forwards, it seems.

Beaton is one of the first senior industry leaders to highlight the growth of casualty insurance-linked securities, as these largely quota share partnerships tend to be termed, as an important market dynamic that casualty underwriters should be watching.

During the White Mountains investor day the Ark collateralized reinsurance sidecar Outrigger Re also came up for discussion.

White Mountains CFO Michael Papamichael highlighted just how profitable that strategy has been for the company, as it supplied third-party capital to fund parts of the sidecar in its first three years of operation.

Papamichael explained to the audience that White Mountains had generated a more than 30% return on capital invested into the sidecar structure.

Which over the course of the 2023 to 2025 underwriting years has now amounted to an impressive $163 million of net income generated.

For White Mountains the attraction was two-pronged, both in supporting Ark, a company it has an investment stake in, and also taking the opportunity to access returns from property catastrophe risk at a time when rates had hardened meaningfully.

Then, as Ark downsized the Outrigger Re sidecar for 2026, due to shifting strategy to access more traditional quota share capacity, White Mountains opted not to participate, with the full $70 million of capital backing Outrigger in 2026 coming from third-party investors.

Beaton discussed Outrigger Re and the support from White Mountains, saying that, “What White Mountains very usefully did in helping set up Outrigger, was inject effectively $200m part of $250m into supporting our Bermuda property cat book after rates had jumped massively, like 30 points, post-hurricane Ian.

“So it was already hard, jumped another 30 points. We couldn’t take that on balance-sheet possibly. So a way of doing that was to take it onto another balance-sheet to manage our BCAR score, as that’s the primary driver of our capital requirements.

“Overtime what’s happened is that fast capital, that Outrigger capital we were intending to wind-down, while building up our quota share support from traditional markets. So that’s what we’ve done.”

But Beaton suggested that Ark may maintain the Outrigger sidecar strategy, given the benefits to the re/insurer in having access to partner capital from investors.

“We probably will keep Outrigger going, if any investors are interested,” Beaton said. “Because, as a vehicle with a track-record, when it turns again it gives us optionality to hit the accelerator fast. We’ll see what happens, but that’s what we’d like to do.”