TransRe-Buffett deal signifies belief in reinsurance amid market turmoil


TransRe-Buffett deal signifies belief in reinsurance amid market turmoil

It is a case of “business as usual” at TransRe following the reinsurer’s acquisition by Warren Buffett’s Berkshire Hathaway, as the company says it will double down on deep, long-term partnerships with its clients as they navigate a number of complex challenges together, moving towards the year-end renewal.

That is the message from Rudiger Skaletz (pictured), chief business development officer, Europe, TransRe, speaking to Intelligent Insurer. He was commenting in the context of Berkshire Hathaway securing regulatory approvals for its acquisition of Alleghany Corporation, TransRe’s parent as part of a $11.6 billion deal that closed on October 19.

“Berkshire has bought us because we are a solid, well-functioning company with a good reputation,” Skaletz said. “It is a very positive development for us. Our ratings have been put on positive watch and it gives us stability and our clients security in a very insecure market, especially on long tail lines.” (We spoke to Skaletz just before the deal closed, and prior to confirmation of the ratings upgrades.)

This ties in with the company’s long-standing values, he says, which are more important than ever in this market. The challenges of inflation, rising cat losses, and an increased demand for reinsurance without additional capacity mean that cedants will need to lean on their long-standing partnerships with reinsurers more than ever.

“Long-standing, good relationships with clients are key. We want partnerships where we can support clients through good times as well as difficult times. We want to work together with clients, we want to support them. That is what our clients want and expect from us,” he said.

In March this year, Buffett’s railways-to-reinsurance group reached an agreement to acquire all of Alleghany’s outstanding shares for $848.02 in cash, a multiple of 1.26x Alleghany’s book value as of December 31, 2021, in an $11.6 billion deal. It was unanimously approved by both boards of directors.

In April, Alleghany confirmed that the “go-shop” period under the merger agreement with Berkshire had ended.

Skaletz believes that Alleghany, and thus TransRe, will continue to operate as an independent subsidiary of Berkshire Hathaway.

He notes that, while the deal is clearly significant for TransRe, it has wider implications for the reinsurance market. At a time of great uncertainty, when some reinsurers are pulling back capacity, third party capital is selective and there are no startups on the horizon, despite soaring rates, the deal indicates a commitment and confidence in the market by Buffett.

“It shows that Warren Buffett still believes in reinsurance, which is a good sign,” Skaletz said. “It’s a very good indication for the market. He realises the market is changing. The dynamics are changing; the overall economics are changing. It is very reassuring to see an investor like Buffett buying into reinsurance because he believes the philosophy of reinsurance has a future. That is reassuring for the whole market and, obviously, for us specifically.”

He adds that, while there will be no direct impact on capacity, the deal has other positive implications. “There is no new capacity per se, but we do not plan to withdraw capacity. In that sense, it’s neutral but in other ways, such as with the rating, it is a very positive development. Our clients have noted that we are on positive outlook, and they appreciate the stability the deal brings. They know we will continue to be there to pay claims, which is very important,” Skaletz said.

“We are in a very good place with Berkshire. Our strategy, risk appetite, services and expertise all remain the same We will remain very accessible. We have a very flat management structure, which our clients appreciate. Right now, everything is business as usual.

“We are an underwriting company, and our underwriters have the power to make decisions. That’s a big differentiator for our clients, which will not change,” he said.

“It gives us stability and our clients security in a very insecure market.” Rudiger Skaletz, TransRe

An inflation gap

The deal has occurred at a challenging time for the market—for many reasons. Skaletz says inflation is the biggest concern for many. Insurers are tackling this in different ways. Some are protected by index clauses—clauses in contracts that fix premiums to inflation—while others are looking at how to introduce such mechanisms into contracts. But he stresses that many players remain unprotected against the inflation that has already occurred this year.

“The impact of inflation is the hottest topic right now in all discussions with brokers and clients,” he said. “There are different approaches emerging in how companies are dealing with this. Index clauses are being looked at closely, but new clauses will not cover what we have already seen this year. There is what I call an inflation gap.

“In the meantime, we are carefully looking at clients’ data to understand the impact of inflation on each book of business. We need to understand that and then calculate what the price should be in the next renewal. That is a challenge. And the poorer the data, the more we need to load the premium.”

He notes another short-term impact of inflation is underinsurance. “The rising cost of construction materials, coupled with rising energy costs, will lead to increased demand for insurance, while for longer tail lines, the impact on reserving will also impact pricing going forward.”

All this leads to increased demand for reinsurance—and higher rates. Skaletz believes there could be as much as €3 billion additional demand in the German market alone. Yet he also doubts there will be significant additional capacity entering the market, which creates a capacity crunch in some areas. That is why he emphasises the importance of deep client/reinsurer relationships.

“There may be a specific trigger point where additional capacity might be attracted, but especially on cat, we have had more than five years of heavy claims. People are concerned about things such as climate change. They are looking to rebalance their portfolios rather than writing more business. Simply, that means prices will go up.”

He adds that an additional concern for the market has been the apparent inability of the main risk models to accurately reflect the impact of secondary perils, such as wildfires, hail stones and flood. This too is driving an increase in demand for reinsurance capacity from cedants, as they reassess the protections they have in place for such perils.

Historical pricing

On pricing, Skaletz notes that rates in cat business have now reached levels comparable with 2005 (based on Guy Carpenter’s Global Catastrophe Rate on Line Index). In the aftermath of hurricanes Katrina, Rita and Wilma, rates rose across the board by almost 40 percent  

“My gut feeling says we are going more in that direction again,” he said. “I don’t want our clients to worry—we have capacity. But that capacity has a price that is increasing.”

The situation will be exacerbated, he believes, by a similar contraction in the retrocessional market, which he estimates has halved over the past five years, from €30 to €15 billion. Some reinsurers rely on retro more heavily than others, and the contraction of capacity is an early warning signal for reinsurance rates

“The retro market was tough last year, but it will be even tougher this year,” he said.

Overall, Skaletz’s message to TransRe clients is to share data and work through the issues: “I expect this to be a long renewal season, with deals being done very late. TransRe doesn’t need to wait, we are ready and willing to finalise terms, and we will trade through this renewal. It is business as usual at TransRe.”

Baden Baden 2022, TransRe, Partnership, Renewals, Inflation, Cat Losses, Capacity, Cedants, Insurance, Reinsurance, Rudiger Skaletz, Europe

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