While there was no conference-defining event to focus the minds of Monte Carlo delegates this year, reinsurers’ levels of capitalisation, profitability prospects and ability to innovate were debated as the industry enters a tough phase in the cycle
Despite the lack of major rating actions, mergers, failures or weather events (unless you count Monday’s torrential downpour) to dictate a central theme of this year’s Monte Carlo Rendez-vous, there was plenty to discuss.
A big talking point was reinsurers’ levels of capital, and what should be done with any excess. The general perception is that the reinsurance industry has too much capital – a position supported by the fact that heavy catastrophe losses in the first half failed to budge rates. Reinsurance broker Guy Carpenter, for example, estimates that the industry was overcapitalised by as much as $20bn, or 12%, at the beginning of 2010, which caused rates to fall by as much as 6% in the renewals.
Guy Carpenter started the debate early, postulating in its Saturday evening press conference that returning capital to shareholders through buy-backs and dividends was not the best way to create long-term value for shareholders, arguing that the call for buy-backs was driven by short-term investors. Instead, the broker said, reinsurers should innovate and seek new ways to put the capital to work.
Not everyone agreed with this suggestion, however. Some pointed out that what appears to be excess capital could suddenly become urgently required funds if a large event hits. Others highlighted the risks inherent in pushing into uncharted waters. “There are numerous examples of companies diversifying and destroying value,” said Mark Coleman, director, financial institutions rating services at rating agency Standard & Poor’s.
Monte Carlo wouldn’t be Monte Carlo without talk of rates, terms and conditions, of which there was plenty this year. The consensus will make uncomfortable reading for reinsurers, however. While reinsurers are keen to maintain price levels or even raise them, the feeling is that, outside catastrophe-hit lines, prices will continue to erode if there are no major events. “The reinsurers may try to talk the market up here and in Baden-Baden but the only way is down,” says Andrew Hitchings, managing director, reinsurance at broker Cooper Gay.
Reinsurers’ long term growth prospects, and the chance of potentially richer pickings elsewhere, could prompt private equity investors to turn their backs on the industry. Glacier Re closed its doors two weeks before Monte Carlo, ostensibly because its owners were unimpressed by the industry’s potential. Some have asked whether there could be more such closures to come. “A lot will be driven by the appetite investors have for the reinsurance business and the business models companies are putting forward,” says Clive O’Connell, head of law firm Barlow Lyde & Gilbert’s commercial risk and reinsurance team.
Reinsurers have clearly fallen out of favour with the investment community, judging by the low valuations, prompting Bill Kennedy, CEO of analytics, capital markets, specialty practices and advisory groups at Guy Carpenter, to comment that the industry was being “unfairly punished”.
According to one delegate, there were notably fewer banks at this year’s Rendez-vous. However, it seems banks are still willing to provide capital to the reinsurance industry. French reinsurer SCOR announced shortly before the event that it had secured a $150m contingent capital facility in conjunction with investment bank UBS, and Société Générale CIB launched a contingent capital facility called EDGE during the event.
The reinsurance industry is also clearly not devoid of opportunities. Nonetheless, the industry is clearly not devoid of opportunities. One notable attempt at product development during the Rendez-vous came from Munich Re, which unveiled plans for a new third-partly liability scheme for oil rigs. The solution would cover the projects themselves, rather than the individual joint venture partners, and would aim to provide coverage limits of between $10bn and $20bn. Rigs backed by a three-strong joint venture can currently only expect limits of up to $4.5bn.
The project got a lukewarm reception from Hannover Re, which said it supported the concept, but viewed the coverage limits as ambitious and said it would not match the $2bn capacity that Munich Re itself is putting up. While declining to give an amount CEO Ulrich Wallin said that Hannover Re’s capacity in such a venture “would definitely not go into the billions”. Other insurers and reinsurers are understood to be mulling their response to the initiative.
While there was no shortage of talking points at this year’s Monte Carlo, there is a sense that some of the events that have defined the conference in previous years, in particular spectacular failures, will be in short supply in future. One CEO lamented that the industry had become boring, in part because the worst companies were no longer around. “It has become a professional industry,” he said.