Not luck, but judgement


Not luck, but judgement

Jed Rhoads, president and chief underwriting officer of Markel

Judgement rather than luck has underpinned strong results in Markel’s reinsurance unit of late—but a change in the industry is now overdue where there may be an over-reliance on models, as Jed Rhoads, chief underwriting officer for Markel’s Global Reinsurance Division, tells Bermuda:Re+ILS.

Old-fashioned values and underwriting discipline partly based on gut instinct have been the keys to Markel’s success on the reinsurance side of its business in the past year, says Jed Rhoads, the president and chief underwriting officer for Markel’s Global Reinsurance Division.

Markel as a whole enjoyed a big increase in profits in the second quarter of 2016 helped by its reinsurance unit, which managed to dodge the worst of the recent catastrophe losses, including May’s Canadian wildfires that hit some of its peers hard.

"There comes a point where one has to make the difficult decision and not acquiesce to continued reductions below technical levels of profitability."

The company posted a comprehensive income to shareholders of $209.9 million for the second quarter of 2016 compared with $132.9 million for the second quarter of 2015. For first the six months of the year, the equivalent figures were $606.9 million compared with $148.9 million for the same period of 2015.

The company’s combined ratio for the period was 93 percent for the second quarter of 2016 compared with 96 percent for the second quarter of 2015. The combined ratio was 90 percent for the six months ended June 30, 2016 and 2015.

Numbers and gut instinct

Rhoads specifically notes that his reinsurance unit made the very difficult decision to reduce or cancel a number of Canadian treaties in last year’s renewals because he felt the pricing was too low. This scenario and the subsequent losses crystallise what sets Markel apart from some of its peers.

“It is all about underwriting discipline and sensible old-fashioned values for us,” he says. “We don’t try to be a global player for the sake of it. Losses often occur where people move outside their knowledge base and comfort zone—they write business in the ‘cold zone’ where the data is not credible and pricing too competitive, and then incur surprise losses. Thai flood losses was an example of this.

“We also rely on more than just numbers from risk models. We certainly heavily use commercial models, but the decision to walk away from Canadian business was more gut instinct. Canada has high quality cedants and data, but the models, while good, are not perfect. We just felt the price was too cheap and we reduced or came off a slew of accounts. We certainly dodged a bullet as a result there.”

Rhoads acknowledges that to draw that sort of hard line in the sand and stick to it is hard.

“We value long-term relationships, and have supported our customers in Canada for a long time, but there comes a point where one has to make the difficult decision and not acquiesce to continued reductions below technical levels of profitability.

“It is easier for Markel,” he says, “because there is less pressure to seek growth for growth’s sake and as a consequence end up with unprofitable business.”

He says the company’s compensation plan is designed to reward profitable growth rather than pure growth, while the company’s very large balance sheet and multiple sources of income—especially as Markel Ventures, effectively a venture capital arm within the firm, grows—mean that there is less pressure on the reinsurance unit to grow for the sake of growth.

“All those things give us breathing room,” he says.

The company’s senior management seem to agree. In a conference call with analysts for its second quarter results, Richie Whitt, co-chief executive officer of Markel Corporation, said that, despite gains so far in 2016 driven by one-off quota share agreements and its mortgage reinsurance unit, tough market conditions make further growth this year unlikely in the reinsurance unit.

For the second quarter gross written premiums in the reinsurance segment, which includes treaty reinsurance programmes written by its global reinsurance division as well as those written by Markel International, were up $11 million, or 4 percent, compared to 2015. On a year-to-date basis writings were up $86 million, or 14 percent, compared to last year.

Whitt is cautious on the prospects for further growth this year.

“While we’re pleased with the results through six months and optimistic for the remainder of 2016, we continue to see extremely difficult market conditions and would not expect significant growth during the rest of the year,” he says.

“Market conditions remain particularly challenging in London and in the large accounts segments. Competition also remained strong in the reinsurance market. However, as I think I stated last quarter, the rates have declined and slowed and in a few cases we’ve even seen some stabilisation.”

A move to funds

The company added another income stream—albeit one with close connections to reinsurance—in December 2015 when it acquired CATCo Investment Management.

The fund, which provides collateralised protections to more than 35 global reinsurance buyers, now operates as Markel CATCo Investment Management. It was always Markel’s intention to run the platform in close conjunction with the traditional reinsurance unit, and the plan seems to be working.

Once a confessed sceptic of the merits of such funds, Rhoads says Markel CATCo’s assets under management have grown significantly to $3.5+ billion since it was taken over by Markel, to the point it is now the fifth largest insurance-linked securities (ILS) fund in the world.

He says there is a natural separation between the reinsurance unit and the fund but buyers generally like the fact they can access the two products of CATCo and Markel. “I used to be sceptical about funds and their longevity but I now see how the successful ones are here to stay and can complement and coexist with traditional reinsurers,” he says.

“Markel CATCo is a very sophisticated unit with great discipline on pricing, which is something we appreciate. I can also see the appeal for buyers. Everyone likes choice and it has added a very helpful string to the Markel bow.”

Turning his attention back to discipline, he notes that well priced business usually delivers reserve releases in a few years’ time—something that has made up a big part of reinsurers’ results in recent years.

But he also admits that the company has to work harder in a soft market to remain in the same spot. While he believes there is some light at the end of the tunnel in terms of rates, things will remain tough for reinsurers in the near term.

“The pace of reductions has slowed; most lines are finding the bottom of the market now, which is a good thing,” he says.

Moving the herd

Rhoads believes a kind of collective urge has emerged in the industry to exercise some discipline, especially in light of recent catastrophe losses.

“There is a herd mentality in the industry but when buffalo start to go over a cliff, the pack does start to slow down,” he says.

“People are saying ‘enough is enough’ now and a natural bottom is emerging. Even some buyers are saying enough is enough—they already have a good deal and they are not pushing for more.”

But, Rhoads believes, a shake-up is still possible in the industry. He thinks that the worst culprits on pricing are the biggest reinsurers—and if just one of these runs into trouble, it would turn the whole market on its head.

“Some of these companies are seen as too big to fail—but we’ve heard this before,” he says. “They by definition of being the largest writers drive the market and set pricing, but I think another large unexpected or un/undermodelled loss, series of losses, or systemic losses could cause problems. If you look at the history of the market, there are instances of near insolvencies of the largest reinsurers turning the market. It’s why cedants have a growing interest in a wide panel of counterparty credit risk.

“Given the soft pricing we have seen over a sustained period, the low interest rate environment, and wide currency fluctuations I would not say that is out of the question. This market feels like some of the worst soft markets of the past where that has been the outcome. Whenever we truly believe there will never be another cycle turn, that’s generally when it happens.”

Meet Jed Rhoads

Jed Rhoads serves as president & chief underwriting officer of Markel’s Global Reinsurance Division. Previously, he was president & chief underwriting officer at Bermuda Reinsurance.

Rhoads has more than 30 years of experience in treaty reinsurance, as an underwriter and a broker, and was until recently vice chairman of the Bermuda Independent Underwriters Association.

From 2002 to 2012, he was managing director responsible for property catastrophe, retrocessional, and structured business for Alterra Bermuda and its predecessor operations, Harbor Point Re and Chubb Re Bermuda.

Prior to that, he served as chief underwriting officer of OPL Bermuda and as principal underwriter at Stockton Re Bermuda.

For 13 years, he served as executive vice president, East Coast regional manager of Sedgwick Re reinsurance intermediary (acquired by MMC in 1998 and now part of Guy Carpenter). Rhoads began his career in 1981 as a reinsurance underwriter at Kemper Reinsurance Company in Long Grove, Illinois.


Markel, Bermuda, Jed Rhoads, Insurance, Reinsurance, Property, Casualty, Catastrophe, Risk management

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