Liability Reinsurance Crisis Could Be Looming, TransRe CEO Says

“There could be a liability crisis in reinsurance in a couple of years,” a reinsurance executive predicted this week.

Ken Brandt, chair, president and chief executive officer of TransRe, offered the assessment during a 30-minute chat with S&P Global Ratings Director Taoufik Gharib at the 40th Annual Insurance Conference. Brandt, who had more positive observations about the property reinsurance market, said liability losses emerging from past accident years, and already starting to show up for more recent years, could spell trouble.

“The U.S. casualty market is driving most of the conversations in the industry right now, without a doubt,” Brandt said, responding to an initial question about overall reinsurance market dynamics. “When I travel around the globe and talk to some of my counterparts of our European customers, [this] is the No. 1 issue that people talk to me about: It’s U.S. casualty—their exposure to the U.S.,” he said.

Is that market going to turn around at some point?

“I don’t know,” Brandt said. “I think that we have a serious issue…..The ’14 through ’19 accident years, or ’15 through ’18—wherever you want to characterize the last soft market for U.S. casualty—are horrendous.”

As a result, “the renewal season right now in reinsurance for casualty covers is very difficult. [There are] lots of tough negotiations going on because the losses coming in are much higher than even our worst-case scenarios during that block of time.”

“We knew they were bad years. It wasn’t….a surprise that that block of time was not going to be profitable. But it’s exceeding our worst-case scenarios,” he repeated.

Couple that with “troubling conversations now” that have reinsurers questioning, “What do the ’20 through ’22 years look like?” he continued. A year ago, reinsurers reasoned that insurers’ corrective underwriting and pricing actions in the late-2019 and 2020 in the primary casualty market had been sufficient. “All the policy limits came down in the U.S., compressed a lot, which was good. Prices went way up, terms tightened up. There was a market correction.”

“And that’s what we felt too. We thought these are going to be solidly, if not terrifically profitable years.” But 12 months later, there’s some—not a lot—but some “claims emergence coming from those years way too early….”

“We know that the ’14 through ’19 years are really bad, worse than we expected. And if it turns out that the ’20 through ’22 years aren’t as good as we had hoped, there could be a liability crisis in reinsurance in a couple years,” he concluded. “When we can do all that math, it’s hard to justify the capital” put into it, he said.

Brandt reported that “a lot of the big players [insurers] are getting high-single digit original prices” on excess casualty now, which sounds like it could be enough to turn results around. “If you get nine or 10 points of price, it sounds like it’s capturing trend,” which also benefits U.S. reinsurers who write casualty coverage on a quota-share basis. “But I don’t think it’s capturing trend. I think we have some ways to go,” he said, stating that the casualty reinsurance market “is at an inflection point for sure.”

(Brandt distinguished between the casualty reinsurance markets in and outside the U.S., noting that within the U.S., it’s a quota share market, while European reinsurers use excess-of-loss contracts. “In an excess of loss market, the reinsurers control their own pricing, subject to market forces. In the U.S., our profitability is dependent on the client’s own pricing,” he said.)

Gharib then asked Brandt whether fourth-quarter 2023 reserve charges recorded by some reinsurance peers were the start of an industry trend or whether they were contained to a handful of companies.

Before he finished the question, Brandt interjected. “I would not use the word contained.”

“I don’t know how some of our peers and customers reserve, but it does not feel like it’s contained. If those bad years are as bad as we think they are, you don’t get out of that with just one reserve adjustment in one quarter in one year.”

“There’s a lot more coming down the pipeline,” he predicted, adding that he hoped to be proven wrong. “But as we’re renewing these midyear casualty covers and we see the loss reserves in those years, it’s pretty stunning,” he said.

Fee income vs. Underwriting Income

At a later point in the session, when Gharib asked Brandt to identify concerning “macro trends,” the reinsurance CEO offered what he characterized as a “philosophical” reflection instead.

“I don’t know how much of a percentage [of market volume] the industry can really afford to be driven by fee income versus underwriting margin, but I do know whatever that portion of the pie is, it’s been growing rapidly over the last five years,” he said.

Offering background for the observation, Brandt first defined “underwriting capital” as the “capital that we put in the hands of people who make underwriting decisions” about risk selection, pricing and terms.

“However much that capital is, there’s a tremendously growing rate of capital going to people who aren’t predominantly or exclusively rewarded on underwriting profit. They’re rewarded on premium volume and fees. So if you think about general agency agreements, MGAs, broker facilities, fronting companies, even ILS managers, and I respect the ILS managers, but they’re paid on raising capital and deploying the capital.”

“Profit is a motive of all these things. Any ILS manager will tell you if I don’t make money, I don’t get capital. But it’s not the driving economic interest that their business model is feeding off,” Brandt suggested.

The ‘Surreal’ World of a Berkshire Reinsurer

Brandt, a career insurance and reinsurance underwriter before he joined TransRe in 2006, no longer worries about underwriting capital, he suggested as he answered a question from Gharib about what it’s like to be part of Berkshire Hathaway Group. Previously, part of AIG, and later Alleghany, Warren Buffett’s Berkshire Hathaway purchased Alleghany in 2022.

Related article: How Warren Buffett Does a Deal: Alleghany Merger Backstory

“If you own a reinsurance company, I highly suggest you get bought by Warren Buffett,” he said. “It’s surreal. I don’t know how else to put it.”

“You work your whole career, as an underwriter at least, working within an organization with limited capital—even if it’s a lot of capital, it’s still limited capital. So you spend an enormous amount of time thinking about that capital. How do I optimize that capital? How do I protect that capital? How do I grow that capital? What’s my ROE last year? What can I get my ROE to this year?…

“These things are all important, [but they] just don’t apply at Berkshire Hathaway as far as I can see. No one’s asking me about our ROEs or our fancy economic capital models. They just want you to make a profit,” Brandt said.

At Berkshire Hathaway, TransRe participates in a surplus pool of over $300 billion, he reported. “The size allows Berkshire Hathaway, from my perspective, to keep everything really simple. They don’t ask us a lot of questions. They want to know what our combined ratio is, what our expense ratio is, what are float is.”

“But no one’s asking me lots of capital questions. And as a CEO, I’m in this strange but enviable position where I don’t really have to worry about the asset side of my balance sheet,” he said. “I’m a CEO who spent his life in underwriting, so I’m comfortable with that. I can spend my time working on the liability side of my balance sheet—that’s basically underwriting. But it’s a really unusual position,” he said.

Asked if the enormous capital pool is driving a change in risk appetite, Brandt said TransRe is not taking more volatility on its books.

“They bought us for who we are. We hire conservative underwriters. We have certain risk appetites. We think we have certain technical expertise in different lines and we stick to that. They didn’t buy us to do other things. They didn’t buy us to say….quadruple your line. That’s not comfortable within our risk construct. So, we’re still doing the same things that we’ve always done.”

“Having said that, we’re going from a $5 billion equity surplus company to this $300 billion. Over time, we really should not be operating as if we’re $5 billion,” Brandt agreed, again noting that when a reinsurer has limited capital, “there’s certain product lines and certain areas that you self-limit to preserve that capital. You’d write more of it if you had more capital.” With the bigger capital pool, Brandt expects, over time, that TransRe “should be able to grow more dramatically” in the business lines it prefers in good markets.

Property Still Strong

In addition to the casualty reinsurance market, Brandt also discussed the property reinsurance market, noting that renewals throughout the year have been consistent, whether in the U.S., UK, Japan, Europe and now Florida. “They’re all coming off really a generational hard property-cat market in 2023, Prices have fallen back a bit, but really plus or minus inflation—maybe 5 percent or so….Upper layers of cat programs have started to reduce at a higher rate—closer to 10 percent. But they’re coming off a pretty elevated rate,” he said.

Bottom line: The property market for reinsurance in terms of pricing is still strong. It’s not as strong as it was 12 months ago, but it’s still very strong.”

Brandt said he believes the structural changes that resulted from reinsurers “en masse saying ‘No Más” to low attachment points at Jan. 1, 2023, are more sustainable than prices. “The price is going to go up and down based upon basically supply-demand factors,” he said, noting later that prices looked like they would move further down for Florida midyear 2024 renewals in the early weeks of the renewal season.

Specifically asked to describe the reinsurance market in Florida, Brandt said, “Last year it was chaotic. This year it was stable. Prices went down early on in the season. There were some aggressive reinsurance companies that were deploying their capital rapidly. It looked like the prices were going to drop fairly uncomfortably too fast. Near the middle-to-end of the renewal season in Florida, everything tightened up.”

Overall, prices in Florida probably went down 5-10 percent, with upper layers falling 10-15 percent, he said.

Gharib also asked Brandt if higher interest rates staying in place longer could mean that discipline starts eroding as reinsurers rely on investment income.

“I don’t think reinsurance has ever been noted for its long-term discipline. So that could happen,” Brandt responded, adding, however, that cash flow underwriting—a market characteristic of the 1990s—”is just a horrible, horrible road to go down. It’s the road to hell.”

No one announces” an intention to go down that road. “No insurance company or reinsurance company sends a memo or calls the underwriter saying, ‘Let’s start cash flow underwriting….What happens is if you’re an underwriter at a company and your manager [was] really pressing hard to achieve underwriting margins, they press less hard. They start pressing a little harder on top line. And this is as old as the industry itself. This is what drives the cycle,” he said, noting that a repeat of cash-flow underwriting now would be problematic.