Investors will need more than a single year’s good performance to be persuaded that the insurance and reinsurance industry has turned a corner, according to Paul Brand, CEO of specialty insurer and reinsurer Convex Group Ltd.
Reinsurers in particular had a good first half in 2023, as their efforts to reprice and restructure business started to pay off. But the current state of the market is “very brittle,” Brand said in an interview. “The year has not finished and people should not forget that,” he said. “There is a real need for carriers to demonstrate to their shareholders that … we can make money over more than a couple of quarters or a year.”
As a result, the current period of high prices in the insurance and reinsurance markets “feels like a more sustained period of rate adjustment than we might historically have been used to,” Brand said.
In previous such markets, typically triggered by one or more large catastrophes, new capital would flow into the industry quickly. “It’s going to take longer for people to convince themselves that, actually, this industry understands what it’s doing, has a handle on the volatility and can appropriately price and manage risk,” Brand said. “That’s not something you resolve with one good year.”
Before 2023, reinsurers had a long run of lackluster returns. The top 20 reinsurers failed to earn their cost of capital in four out of the prior five years, according to S&P Global Ratings.
More increases
Convex, which Brand and fellow Lloyd’s market veteran Stephen Catlin founded in 2019, made its first annual underwriting profit in 2022, with a combined ratio of 98%. Investment losses and foreign exchange impacts meant that the group still reported a net loss — although, at $142 million, it was smaller than 2021’s $158 million.
Brand, who took over from Catlin as Convex’s CEO in July 2022, said the company was “very pleased” with the 98% combined ratio, which it achieved in the face of a series of large loss events for the industry in 2022, including Hurricane Ian. “It shows that the business is growing into its expense base and is underwriting profitably in quite a volatile market,” he said. While he did not give a precise number, Brand said Convex’s combined ratio for the first half of 2023 had been below 98%.
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Convex CEO Paul Brand |
There are signs that Convex’s profitability could continue to improve. Price increases have already exceeded Convex’s expectations. For the insurance business, increases were about 12%, compared with the 6% in the company’s plan, while on the reinsurance side they were approximately double the 10% to 12% predicted, according to Brand. “That rate is being driven because the market really hasn’t been returning sufficient profit to its shareholders, to its capital,” Brand said. “And that does need to change because at the end of the day, the insurance and reinsurance industry is only as strong as the investors that choose to back it, and they’ve got other choices.”
Prices should continue to rise. Demand for cover is growing because the world is riskier, Brand said, and the supply of capital is not yet meeting this demand. While he expects the upcoming Jan. 1 reinsurance renewals to be less fraught than last year’s, “we should be expecting to see price increases,” Brand said.
The cost of running Convex is not rising as quickly as its premium volume, Brand added. The company is no longer adding large numbers of employees to its books. The company currently employs about 450 people, up from about 420 at the end of 2022. “We’ve got enough [people] to move the portfolio forward quite comfortably,” Brand said.
In addition, Convex will “hopefully” enjoy better investment returns in 2023 as mark-to-market investment losses incurred in 2022 unwind.
The combination of higher prices, lower relative expenses and better investment returns boosts the expectation of profit, Brand said.
But with the North Atlantic hurricane season not yet over, “we don’t know what the total loss cost for 2023 might be,” he added.
Further to go
Convex also plans to continue growing. Gross written premiums were just over $3 billion in 2022, and the company expects to write north of $4 billion in 2023. While price increases have been better than expected, Brand noted that the market conditions were not perfect everywhere, with rate reductions in directors’ and officers’ liability insurance, for example. “It feels like we’re going to be about bang on the plan as opposed to a long way over,” he said.
The theoretical addressable market for a company like Convex is about $150 billion of premium, Brand said, and longer term, the company is hoping to capture closer to 5% of this compared with the current level of around 2.5%. But he added that this is not a forecast for a specific time frame. “[It] will take us a period of time to get there,” Brand said.
