Executives at the Insurance Insider US New York City Conference 2024 discussed a wide range of topics including E&S, litigation trends, MGAs and consolidation.
Ryan Specialty CEO Pat Ryan opened the event, commenting that he expects the E&S space to continue growing, but that the pace of expansion will depend on climate factors and the effects of social inflation.
“I think a lot of it depends on the storm season,” he said, adding that he expects a “tough summer season” as climate change manifests, not only through hurricanes, but also with severe convective storms and rising wildfire risks.
Participants on the property panel echoed Ryan and added that the flow of property risk into the E&S market will likely continue, and the direction is likely to be one way.
Skyward Specialty CEO Andrew Robinson noted that he has not seen E&S flow back into the admitted market, even as rates moderate to the low-single digits from their hard market peak last year.
“I used to believe there would be a reverse flow; I’m now a believer that we’re seeing a structural change, appropriately,” he said.
Executives on the Market Thermometer: Taking an industry temperature check panel agreed that they don’t see the cycle flow from E&S back into admitted continuing, especially for mid- to-large commercial accounts.
Kinsale CEO Mike Kehoe said: “It’s 30-plus-year trend, not every single year, but the general trend over decades is the E&S market is taking share from the standard market, I think principally because the tort system in the US is inherently dynamic. It’s a state-based tort system.”
Social inflation
Ryan also noted that nuclear verdicts and social inflation will affect the pace of growth in the E&S channel.
“Jurors are angry, the general public is often angry, and that gets manifested in these kinds of outcomes,” he said.
Kehoe added that although trends are unabating, losses fuel the industry.
“We can be a little bit pessimistic around litigation trends, litigation financing, the tort system, when really it keeps us in business. We just need to know what the price is,” he said.
Vantage Risk CEO Greg Hendrick continued: “If there are no losses, there are no returns.”
Participants on the casualty panel presented a mixed picture of the litigation environment and the broader tort system, including a well-organized plaintiffs’ bar.
HW Kaufman Group SVP Paul Smith predicted that loss cost inflation in three years will be “stable to slightly higher” than the present rate.
Meanwhile, RLI president and CEO Craig Kliethermes said, “This thing’s not going to turn on a dime – we’re not even at the turning point yet.”
Bill Chepulis, head of large casualty for Zurich NA, said he expects the market to be more stable than today, but agreed it will not take a drastic turn in the short run.
Ultimately, the push will have to come at the state and local level, said Chepulis. And raising customer awareness will be key.
“A lot of consumers don’t understand that the cost of nuclear verdicts will eventually be paid through insurance premiums, which in turn will increase the costs of goods sold. The industry doesn’t do a very good job in terms of educating and connecting those dots.”
MGAs
On the MGA front, Ryan added that the delegated authority space will also benefit from specialization, as underwriters seek to differentiate themselves from competitors.
As such, he said there is room for MGAs, MGUs and fronting carriers to continue growing in the industry.
He warned that underwriters must focus on the growth and the profitability of their portfolios.
Guy Carpenter chief commercial officer Keith Wolfe said that for MGAs to remain successful and avoid past mistakes, they need to strike a balance and, first and foremost, focus on underwriting.
Panelists on the distribution panel noted that for M&A transactions to get over the line, there must be a meeting point between seller and buyer expectations, which hasn’t always been the case recently, particularly for MGA deals.
Gallagher VP of M&A David Bauer said that MGA deals that didn’t close “broke down in due diligence over sustainability of earnings or if the growth curve was too high, because they're demanding a big multiple”.
He said that, given the niche nature of MGAs, buyers also need to ask how big the niche is that the MGA serves, and if the company is “a one-trick pony”.
Executives estimated that platforms are currently commanding multiples around 15x-17x Ebitda, whereas monoline MGAs are more likely to get 10x-12x Ebitda.
On valuations, Bauer predicted that the market is at or around its peak.
Specialty Program Group president and CEO Chris Treanor said that historically, it would have been easier to get a high multiple, but currently, it’s really “a flight to quality”.
When asked whether there are enough acquisition targets in the broking space, the panelists overwhelmingly said yes, both in retail and in wholesale.
Jackie Bolig, WTW head of P&C, CRB NA, noted that some less traditional acquisitions could be possible, especially in the tech space.
Victor CEO Charles Williamson argued that many executives have been part of a company that was subject to a less-than-ideal tech acquisition, while Treanor argued that good quality digital businesses exist, and the key is finding those.
Fronting
Wolfe noted that the fronting model can get very complicated very quickly.
Ryan cautioned that the industry must be “careful” about the quality of the capital sitting behind the fronting companies and MGAs.
“You have to be careful who your neighbors are,” he said.
Hendrick added that consolidation will be necessary in fronting. “There is not enough good business to feed 28 fronting companies and hundreds and hundreds of MGAs,” he said.
Panelists pointed out that, especially in fronting, discipline is the name of the game. They noted that there are different risks for traditional fronting carriers and hybrid fronting carriers, but in both cases, relationships are key.
Treanor said: “It's the non-concurrency. It's the Construction Bank of China letters of credit. It's all the different things that can get you if you're not really buttoned up. We trade with all the front of companies and there's a lot of high-quality ones, and there's some who are probably not as disciplined in that space. That's the entire game, and the disciplined ones will survive.”
When asked about consolidation in fronting, Williamson added that, as most of the fronts came about in the hard market, they’ve done okay overall. Until there’s a major driving event, the companies don’t necessarily have to do anything.
“It's hard to be sub-scale, but it's not impossible, so I have to agree with that capital will ultimately drive it,” he said.
“I think those issues will be driven by adverse development, reinsurance non-concurrencies, black swan events – things that will put these fronting companies, especially the smaller ones, into some pain.”
Consolidation
Executives expect consolidation to continue throughout the US insurance value chain as companies seek more scale, diversity and specialization.
Bolig noted that scale is a major reason why consolidation is occurring, and is expected to continue.
“There's this never-ending thirst for more scale. That scale does do a lot of things; [it] enables you to innovate, it enables you to drive commissions and it enables you to facilitate your business, but really the biggest part of scale is huge data,” she said.
With regard to the smaller and mid-sized platforms, SPG’s Treanor said they are “looking a little bit on borrowed time” before consolidation begins.
“I think there's going to have to be a shakeout in the market, and for those smaller aggregators, I don't think that there is a good five-year opportunity for them to continue to do well,” he said.
“They were formed in a low interest rate environment and a hard market environment. Those dynamics have changed or are changing, so it's going to be harder for them to sustain.”