Well-positioned for future growth

It has been another eventful year for the XL Group. Following the purchase of Catlin Group Limited in 2015, the company, whose insurance and reinsurance companies operate under the XL Catlin global brand, is going through the process of understanding the consequences of another acquisition as it prepares to be acquired by AXA SA.

As the company embarks on this transition, some important changes have already been revealed. There will be some important changes to the executive management team.

AXA has confirmed that the reinsurance segment will continue to be led by Charles Cooper, whose brand of experience and leadership is highly regarded. In the run-up to the Monte Carlo Rendez-Vous, Cooper is positive and precise about where XL Catlin stands in the current market and is keen to stress the certainty the AXA deal delivers.

“I look at XL as being extremely well-positioned,” says Cooper. “When we came together as XL and Catlin in 2015 we brought together two reinsurance companies that wrote around $1.8 billion of premium each. We joined up and had about $3.6 billion in premium; since then we’ve grown to about $4.7 billion.

“We are now an established lead player in all four of the major global reinsurance markets: Continental Europe, London, North America and Bermuda.”

Deep roots, positive intentions

Overlying that is the company’s substantial position in the emerging wholesale markets of Dubai, Miami and Singapore, where it has had operations for many years. Beyond that XL Catlin has local operations in places such as Canada, China, India, Australia, Colombia and Italy. The company is utilising those smaller offices to access the business that might not make it to the larger wholesale market.

“We’re well-positioned because we have $4.7 billion of business that is very broad in terms of classes of business, types of customer, and distribution sources, so that places us very well in this market,” Cooper summarises.

XL has maintained its very acute client focus—historically XL and Catlin both did this as individual companies. Because of that, Cooper believes, XL Catlin has developed client relationships that are very deep and very broad. The company has many clients it trades with in different classes of business, through many different platforms.

“Being able to do that in a cohesive and joined-up way enables us to establish very deep, meaningful and multi-touchpoint relationships with our buyers,” he says.

Turning to the general market as it stood at the midpoint of the year, Cooper is again positive.

“Broadly, trading conditions are better than they were at this time last year,” he says. “We’ve seen year-to-date increases in the mid-single-digit range, versus slight decreases last year in the entire portfolio, so from that standpoint trading conditions are better.

“People usually talk about the property cat market when they talk about rates, because it is obviously so important, but what we are seeing this year is rate increases across all classes of business in the reinsurance market, which is encouraging.”

According to Cooper, some commentators will say that the cat rate achieved this year might be less than expected, but he thinks that might be a function of a change in the market dynamics over those of the last 10 years.

As a result, he says, it’s a validation of the theory that alternative capital is backed by many very deep-pocketed investors who have become comfortable with cat risk as an asset class. They are happy to reinvest and that negates any current capital scarcity.

Consequences

Cooper believes that investors are more comfortable about cat risks and that there has been a shift in the way the market functions as a result.

“In the wake of the $100 billion in cat losses in 2017, cat rates did go up a bit, but not as much as they would have if similar events had happened 10 years ago.

“In the long term we are going to see more stability in cat pricing. It won’t go up post-event but, conversely, we are going to see more pressure to hold margins relatively similar to where they are now,” he states.

“There’s more transparency in cat pricing using cat models that are fairly well accepted and broadly used. Models provide a good relative measure of risk that reinsurers and investors focus on, so we’ll see more stability in cat pricing.

“The second consequence is that we’ll see people focus more on being paid appropriately for the risk they are assuming every year, knowing that the concept of large rate increases following an event may not happen—you need to be paid appropriately every year.”

The third consequence Cooper identifies is that portfolio construction, and how different reinsurers manage their gross and net exposures in their portfolios, will become increasingly important.

The fourth consequence, a function of what the market has been seeing with the recent broad rate increases, is that there has been a great deal of focus in the last decade on property cat, because that area has provided the bulk of the profit for the reinsurance market.

As a result of this, Cooper believes, reinsurers are waking up to the absence of significant cat margin, which shines a bright spotlight on the absence of sustainable margin in many other classes of business.

“What we are seeing is more pressure on lines of business outside property cat. That’s an interesting aspect of the market that will continue for a while,” he says.

“The final consequence is that we are seeing challenges to certain business models in the re/insurance world. We’ve been seeing this for the past five to 10 years, as cat-centric reinsurance companies quickly tried to diversify into other classes of business beyond that. This is particularly relevant to the Bermuda market beyond the core cat portfolio.”

Cooper points out that the market is now seeing more merger and acquisition (M&A) activity as business models evolve and people buy into the theory that scale is important in their business. As a direct result of this, Cooper says, reinsurers are revaluating their expense structures and looking for more efficient ways to operate.

The market is also seeing re/insurers embrace insurtech, as they ponder how to become more operationally efficient, how to utilise technology and how to embrace data and analytics and apply those to portfolio construction and risk selection.

As a result, Cooper believes, it’s a more thoughtful market, as people are more focused on portfolio decisions and looking carefully at every class of business to ensure there is adequate margin.

Our island home

Cooper remains extremely positive as to Bermuda’s place in the global re/insurance market. XL Catlin was one of the sponsors of the Ocean Risk Summit in May 2018, the first event of its kind, which focused on how governments and the business sector should respond to the risks of existing and projected changes in the ocean—until recently these have been poorly understood. The company has also made a series of high-profile appointments and announcements on the Island and globally.

According to Cooper, the Bermuda market is unique from some perspectives because it has always been characterised by high-severity, low-frequency, capital-intensive lines of business, the most obvious one being property cat, another being high excess casualty classes of business. Neither of those classes of business has enough historical data to accurately quantify the risk, so different techniques are required.

For the catastrophe sector the Bermuda market uses sophisticated models to come up with expected losses; for high excess casualty classes there are other loss models. There can be a wide divergence from expected loss to actual loss in any given year—a fundamental feature of the Bermuda market.

“Also, historically, a significant amount of the capacity utilised by Florida domestic insurance companies is provided by the Bermuda market—I think it’s about 40 percent,” says Cooper. “Given that whatever happens in the Florida market is heavily debated and discussed on Front Street, the price increases published in June around Florida renewals had a significant impact on Bermuda companies.”

He adds that M&A has become a major topic of conversation in Bermuda.

“In some ways the Bermuda market is a microcosm of the global market. The reinsurance market is seeing what I would describe as rapid evolution—and Bermuda has always been a place where such rapid evolution is embraced,” Cooper concludes.

“In 2017 there was $100 billion in cat losses and then significant tax law changes in the US.

“Both of those things, in different ways, challenge the Bermuda business model. It is rapidly evolving as different reinsurers take different strategies, but it continues in my mind to be the most favourable jurisdiction in the world, particularly for those writing the kind of business that Bermuda has always thrived on.”