Soft market growth – a retrospective
Amid an environment of rampant social inflation, one of the best indicators of risk is how much growth was written in problematic lines during the soft market years – not how eloquent management are on conference calls about their market “leadership”.
Of course, in many ways this is overly simplistic. But it is a reasonable starting point as a triage for risk – even if there are fundamental reasons why some soft-market growth came without compromising on underwriting standards. In a business founded on the “self-graded exam”, it behoves external analysts to “Trust, but verify”. With more emphasis on the latter than the former.
To that end, we put together a quick study of market share changes in other liability lines from 2014 to 2018, the years showing most strain, particularly in lines like D&O where the claims tail is proving longer than many thought.
At a high level, the rate of market share churn is quite extraordinary, with 13 companies among the top 24 firms giving up $6.1bn in share during the soft market years in other liability lines combined. On the other hand, 11 of these leading companies gained $4.9bn in market share (with the rest falling to smaller firms outside the top 24).
However, looking at specific companies, we see three key takeaways:
First, the market has seen incredible churn concentrated in a handful of legacy market leaders.
Many companies have seemingly never reversed the re-underwriting actions begun in the last market turn just under a decade ago. Market share losses were led by AIG at $2.8bn, Zurich at $892mn, Liberty Mutual at $825mn, and CNA at $542mn for a combined $5bn.
Given both what we know about the stickiness of business in general, and the fact that only ~$15bn of total premium is controlled by the hundreds of firms outside of this sample, it is reasonable to assume that those that grew largely did so by taking business from this group, whether through push (picking up and re-underwriting their trash) or pull (taking talent and migrating target business).
This simple math is hard to get away from, regardless of what management teams have said publicly about being suspicious of taking business from the likes of AIG.
Second, several firms that used M&A as a soft market tool have been among the most disciplined in soft market underwriting.
M&A is a powerful tool at the start of the soft-market, where there is a lower probability of balance sheet surprises, and the combined portfolio and general “noise” around the numbers buys time to re-underwrite the combined portfolio and shed the worst risks without pressure to grow in soft market conditions. To that end, we note several firms to engage in significant early soft-market.
M&A including Chubb (Ace-Chubb), Axa-XL (XL-Catlin), and Arch (UGC) all gave up significant amounts of market share worth hundreds of millions of dollars combined. Axis also gave up marginal share, likely aided by its acquisition of Novae and, ironically, the assault on its book by defectors to Endurance/ Sompo.
Third, there have been colossal market share gains by companies that bet big on acquiring business from incumbents through acquiring teams instead of companies.
There has been a wave of companies since the last hard market who chose to acquire business not through M&A, but through tempting out talent from competitors with attractive compensation on the principle they will be able to attract revenues from their former employer.
Combined, in some instances, with a “clean” (or cleanish) balance sheet and new infrastructure, the model comes at the cost of a higher upfront expense ratio but no goodwill when built out to scale (with the accumulated start-up loss representing a kind of expensed goodwill).Most notable in this regard was:
Berkshire Hathaway gained $1.2bn of market share in other liability from 2014 to 2018, driven by $756mn of share gains in claims made coverages. Recall the business was founded by the departures of four AIG executives, led by former Americas P&C CEO Peter Eastwood.
Sompo gained $539mn of market share, with big gains in both other liability lines. Recall, as well as some M&A, the firm made several high profile hires in the US including US insurance CEO Christopher Sparro (from AIG) and Global Risk Solutions CEO Michael Chang (from Chubb).
Everest Re gained $380mn in other liability market share, driven by $317mn of occurrence coverages. The firm has been an aggressive acquirer of talent from across the industry, including AIG, Axis, CV Starr, and Marsh.
This strategy has been given a significant industry tailwind by the combination of M&A leading to orphaned teams and the significant shakeout of talent at AIG. However, the underwriting environment through to 2019 has been less forgiving. As such, the next few years are likely to provide a tough examination of which of these forces will win out, and how well these strategies were executed while maintaining underwriting discipline.
Of course, these companies were not alone in growing share during these years, and plenty of others remained in the “fun” phase likely a shade longer than they would like to admit publicly.