The Insurer interview with Mike Sapnar, President and CEO of TransRe – Part 1

Listen to the podcast.

In this podcast Mike Sapnar, President and CEO of TransRe, looks at:

  • Current market conditions
  • How today compares to prior hard markets
  • Lessons from Covid-19

Can’t listen now? Read the edited transcript

Have you ever seen market conditions like today? How does today’s situation compare?

It’s certainly rapidly hardening, but I don’t think it’s even close to hard markets that I’ve seen in the past specifically post 1986. I think a really hard market is when you can’t find the capacity – it’s not available at any price. We’re seeing deals get done for the most part. If you have a large casualty tower, maybe there’s some capacity holes and things are shrinking, if you’re starting at a very high limit ($500 million plus) but in terms of getting deals done, I think brokers feel they can get things done. That the price is acceptable. In 1986 you just could not get insurance or reinsurance capacity, and there was very little capital coming in. There were insolvencies. All lines were affected. It wasn’t limited to casualty or property. It was a long and deep hard market.

While the insurance market is improving, it is not so robust on the reinsurance side, especially if you talk about casualty and pro-rata casualty. Property cat reinsurance might be hardening as fast as original rates, but clearly this is not in all territories and all lines. In fact, internationally there’s been quite a lag. Now, every hard market is a little bit different, so I haven’t seen anything with this dynamic. What is interesting is we have an investment issue at the same time as a risk issue. But just in terms of insurance hard markets, today trails both 1986 and 2001.

What is the difference between now and before?

You buy reinsurance for two reasons – capital and uncertainty. Here you have the uncertainty, but not the capital issues. I don’t see companies going under right now. Capital is as available and as cheap as it has ever been. People can access the capital markets. The equity and debt markets are listening to the stories and are offering capital. That wasn’t the case in 1986, nor in 2001/2002. This is not a blood-in-the-streets, holes-in-balance-sheets hard market. This is a returns based, losing job, fearing Covid uncertainty hard market, and that’s different.

What is the outlook as we approach 1/1?

I agree with my peers, that it is an improving market, and it will stay an improving market, especially casualty. Property may not stay that way for the next 24 to 36 months, depending on loss activity and how much new capacity enters. Relatively speaking, we are getting into a more attractive market, a hardening market, but on an absolute basis I wouldn’t call it a hard market. We are being properly compensated for the risks assumed. We’re not being over-compensated. Step 1 is to get back to proper compensation. Lets at least get paid for that. For a truly hard market we also need a capital crunch, and we’re not there.

Are people raising capital to fill balance sheet holes, or because they think it’s cheap?

It is interesting to see people raising capital. Not all capital comes with the same terms: how long you hold it, and how much it costs and what covenants (implicit or explicit) come with it. Those details can change people’s behavior. Like I said, reinsurance deals are getting done.

What about Florida?

Florida might be a little bit of an exception, but brokers tell me it was better, easier at July 1 than June 1. Whether that continues remains to be seen.

How long do you think it will be before we have a clear picture of the Covid-19 story?

The event is still going on. I’m not sure we will ever know the full effects with any certainty, because it isn’t just a liability issue or a loss issue. Look at the casualty side. I don’t know how long a workers’ comp claim will extend. What about healthcare? People are deferring elective surgeries right now. Well, what’s the definition of elective. Some things require emergency surgery, and there is an expression ‘minor surgery is the surgery somebody else has’. Some things that are elective now, but in the long term they need to be done. Those that get delayed with have health (and liability) consequences.

The courts are closed right now. Is that deferring frequency? What happens when they reopen? How do we settle those cases? Will there be redistribution of wealth because of the issues Covid-19 has raised? How will the credit markets respond when all the surety losses become manifest?

Does your business model need to change?

The investment environment (monetary easing and fiscal policy) is extremely aggressive, driving interest rates down to virtually zero or negative across the world. That has ramifications on underwriting. If there is no value from the float, we have to make all our return from underwriting.

We face reviver claims opening up as well as the possibility of business interruption losses we didn’t think we were covering.

In the past, when levees broke in New Orleans, we were all able to move through because there was some cushioning on the investment side. We would wake up leveraged three to one. 5-8% investment returns delivered 15-24% to our ROE. We had expenses of course, but that’s a pretty good start. You could argue that lower interest rates reduces your hurdle rate since you’re offering a spread above risk-free, but the problem when your only upside is underwriting profit – is that its a finite upside. The most we can make is our premium. But I know we will take some losses. When we invest, especially in equities, there’s infinite upside and I can make more attractive risk reward investments. So even though the risk free rates are down, and our hurdle rates are down, I’m not sure the spread we will be able to offer above risk free is commensurate with the risks we actually take.

We take a lot of asymmetric risk, where our limits are multiples, multiples of our premium and the aggregations of those limits are multiples, multiples, multiples, multiples, multiples of that premium. We like to say that our business is not the nine good deals we write, it’s the one bad deal we avoid.

Right now, in this environment, that one bad deal would cause an awful lot of relative pain, because there’s just not a lot of margin for error.

How does that affect your risk appetite?

I think we will see more conservative risk appetites and a lot more conservative balance sheets. And we should also see better reinsurance pricing. But what happens to reinsurance demand depends on the product line.

Take D&O. It is an $8-$10 billion industry. There are 40 D&P writers, and their capital base is enormous relative to the premium. So those writers ask themselves – do I choose to cut limits/exposures or buy more reinsurance on what I think are punitive terms? Right now they are choosing to write less insurance rather than buy a reinsurance quota share with a 23 cede. They will say ‘we want to buy it with a 33 cede’ and they have a walkaway price because they have enough capital on the balance sheet to do so because its non-aggregating, claims made and their book of D&O is small compared to their overall book.

So we are seeing a lot more of that kind of line in the sand: buyers will buy at a certain price, but walk away at another because its’s not a capital need. Its an uncertainty buy. They will shrink their book rather than accept a ceding commission below their own expenses.

What about industry costs?

That’s a whole different conversation. We only return about 55 cents on the dollar to insureds. We have too much in expenses and overhead and admin and LAE. And if our profit margin has to expand, where is that going to come from? From more rate, which means we will return a lower percent of each dollar to the customer? It has to come from cutting costs. If you return less value to the customer, in terms of claims on a percentage basis, your value proposition goes down. Your ability to sell insurance goes down. The likelihood of substitute products goes up. That’s not good for the industry.

What work practices need to change?

I think 80% of our costs are people plus travel and entertainment. That is probably higher for brokers. Its not really overhead in terms of real estate. So we can travel less and save a couple bucks and lower our expense ratios a few points. But the bigger question is ‘what will artificial intelligence do?’ What will process efficiencies do to our cost of human capital in our business?

We have two types of business: commoditized and idiosyncratic. Too much of our commoditized business is still touched a lot, by a lot of people in a lot of organizations. If you buy a homeowners or commercial property policy, you may go to an MGA or an agent or a broker, who then goes to an insurance company, then to a reinsurance broker, to a reinsurance company, to a retro broker or a capital market, or a retrocessionaire. That’s too many people at too many companies. That will change.

The same thing, more slowly, will happen with idiosyncratic risks, although I expect to see a lot more automated medical malpractice, credit insurance reps and warranties covers, certain GL lines of business, and complex property accounts that will continue to need more interaction, discussion, negotiation, risk management, risk analysis, and underwriting. Those are not necessarily suitable for broad based metrics and commoditization.

I think the industry really needs to split, not just on people, but on balance sheets. And maybe commoditized risks don’t run through a balance sheet, but find their way directly to deeper capital markets, minus paper. Meanwhile, more idiosyncratic risks will demand a higher rated balance sheet.

How will Covid changes affect your staff?

We are talking about people’s lives, not just livelihoods. Perhaps we will develop rules: if you commit to a certain number of days a week in the office, or a number of days a year, and if you are over that number, you will have dedicated workspace. If you’re under that number, you’ll have flex workspace and you can work from wherever.

That probably allows us to skinny down real estate expenses, including office furniture and fit outs and maximize efficiencies. But, for reinsurers those are smaller questions than having 650 people worldwide. Our labor leverage is already pretty good.

(Part 2 will cover property cats and strategic capital relationships, the insureability of pandemics, public/private solutions, Covid-19 to systemic cyber exposures as well as the diversity issue).


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