The calm before the storm?

We have been monitoring the stream of Q1/14 quarterly reports coming from the publicly-quoted (re)insurance markets. Our overall impression is that the well-managed and well-capitalized players are performing will, with improved combined ratios and good capital retention.

However, we believe that there are a number of factors that mean that, as we have said before, significant restructuring is likely within the industry over the medium term- with Endurance’s contested bid for Aspen simply a foretaste of things to come.

Firstly, the flood of non-traditional and alternative capital in the (re) insurance market continues unabated, with CAT bond issuance in ever-greater size, where demand is driving price down, such as for Florida windstorm.

Secondly, the interest rate environment remains difficult for anyone trying to generate decent running yield on their Invested Assets, with returns grinding down as assets are re-priced. So, portfolio managers are forced either to “reach for yield”, which may well mean exposure to asset classes or valuations that are volatile and not really a proper match for P&C liabilities; or, their colleagues on the underwriting side should consider if there may be ways in which they can gain exposure and generate premium income more appropriately using the liability side of the balance sheet.

Thirdly, prices in many of the more “generic” or “better understood” risk classes continue their seemingly inexorable descent, which makes generating an adequate return on traditional capital increasingly difficult; and is beginning to lead to a 2-tier market, split between the “haves” and “have nots”- those who can and will be able to take such risks, and those who are simply storing up trouble.

Fourthly, some of the recent underwriting results have been flattered by continuing reserve releases, and the absence of any major, industry-affecting catastrophe events. On the former, we would simply say that, by definition, release of reserves is a finite resource and can quickly need to be reversed; while on the latter, we hesitate to say “it’s too quiet out there”, but we all know that there will be another “Big One”, of whatever sort.

So, at Awbury, we keep a weather eye on industry trends and developments, recognizing that we inhabit a dynamic environment, where being nimble, proactive, rational and flexible are virtues.

-The Awbury Team

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