Reinsurance firm PartnerRe (NYSE:PRE) noticed "further erosion of prices and terms, driven by an oversupply of capital" according to its President Emmanuel Clarke, as the reinsurer reported a decline in premiums of 5% at the January renewals.
Opinions on how bad the reinsurance renewals in January were seem largely to depend on the scale and reach of the company commenting, or the focus and lines it underwrites. For PartnerRe, which sits below the largest reinsurance companies in terms of scale, the pressure on terms and conditions appears more evident.
According to market sources we've spoken with, the very large reinsurers appear to have tried to maintain terms, albeit with some slippage in certain lines, but a significant number of treaties not renewed as a result of the unattractive terms on offer.
By walking away and showing cedents they are not prepared to take further expansion of terms some of the large reinsurers appear to be saying enough is enough. PartnerRe seems to be joining this group, citing the continued terms erosion as one of the reasons for reducing volumes at January 2016.
PartnerRe President Emmanuel Clarke commented; "As we expected, the January 1 renewal was characterized by further erosion of prices and terms, driven by an oversupply of capital. Given these persistent challenging operating conditions, we approached the renewal expecting a reduction in volume and capital deployed."
During the January 1st 2016 treaty reinsurance renewals PartnerRe said that it expects to underwrite and bind around $2.5 billion of Non-Life treaty premiums, representing a decrease of 5% from the renewable premium base.
This is almost 65% percent of PartnerRe's total annual Non-Life treaty business, with the rest consisting of treaty business renewing at other times during the year. PartnerRe also underwrites $400 million of facilitative reinsurance business which renews throughout the year.
"Our teams did an excellent job of maintaining discipline throughout negotiations, while further strengthening our high quality client and broker relationships. The strength of the PartnerRe franchise resulted in us renewing a high quality portfolio, in some cases at superior market terms, and finding additional pockets of attractive new business," Clarke continued.
PartnerRe has perhaps been a little more exposed to the property catastrophe reinsurance renewals, than some other large reinsurers, causing it to experience more pressure on terms.
The issue of expanding terms and conditions is perhaps under-estimated in the reinsurance market right now. Terms expansion can lead to unexpected, or outsized, loss experience by companies, something that we won't be able to understand until a difficult, or large loss or series of losses occurs.
Terms and conditions are generally poorly represented in the risk models, making it very hard for companies to assess how their own exposure has expanded alongside broadening of terms and even more difficult for analysts to understand.
Given we've now seen a number of consecutive years of terms and conditions expansion it stands to reason that companies exposure to different events will be diverging quite considerably, especially given some companies will negotiate their own terms before signings.
It stands to make the fall-out of any increase in loss activity very interesting to watch, as companies portfolios respond in different ways as differing terms, inclusions, expansions, all serve to add to the uncertainty surrounding the stability of some companies strategies right now.
At the end of the day, the winners and losers will be decided by whose results perform for the longest, if the current reinsurance market conditions and pressure remain. As we've said before, this provides an opportune moment for innovative, efficient business models to gain traction and demonstrate that there are new ways to manage risk, capital and investments in re/insurance.
Of course PartnerRe is perhaps en route to a different business model, as it is set to be taken over by EXOR and become part of a diversified investment group. How that impacts its cost-of-capital and efficiency going forwards will be fascinating to watch.
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