Stephen Catlin has warned that the re/insurance industry is in a much tougher market than industry executives will admit.
Many carriers will be “cashflow negative” by the end of next year, he predicted during the Rendezvous reinsurance industry networking event in Monte Carlo this week.
Mr Catlin famously built Catlin Group from scratch and stepped down as deputy chairman of its acquirer XL Group last year. He is a widely respected figure, especially in the Bermuda and London markets.
These days, he is a senior adviser with Aquiline Capital Partners, a US private-equity firm, and the chairman of the Insurance Development Forum.
He is confident that once re/insurers see more money going out than coming in, prices will take a turn higher.
“I am no longer at the coalface but that means I can speak my mind,” Mr Catlin told Monte Carlo Today.
“I talk to people all the time and it is clear to me that the market is in a much worse position than people will admit. It is very difficult for executives in public companies to say what they feel because they fear the reaction of their shareholders.
“I believe that by end of 2019 a large number of carriers will be experiencing negative cashflow. And at that point, they will be forced to act.
“You can just about carry on if cashflow is weak but positive, or even neutral. But negative cashflow will hit your balance sheet very quickly and that will force a turn in the market.”
He said there were some signs that insurers were refusing to accept inadequate pricing. “We are starting to see the signs of a change — some carriers fleeing classes of business because they see no way forward. That is the start of a turn,” he said.
Carriers will be forced to charge higher rates and when brokers start to fail to get placements finished, then the industry — and its investors — will wake up to the gravity of the situation, he added.
“Those who say this is the new norm and these prices are here to stay are naive,” Mr Catlin said. “The market cannot continue to write business at losses.
“Once they have depleted their reserves, as many have, investors will not continue to support an industry that is losing money.”
Mr Catlin said most executives agree with him but they cannot risking saying so, because they run publicly traded companies.
“I understand that — if I had a balance sheet now I would be the same,” Mr Catlin said. “They don’t want to be the first to deliver bad news, but once a market starts hearing serious bad news it turns.
“It gets to a point where a CEO cannot afford to be circumspect any more.”
Mr Catlin said last year almost every product line except energy made a loss in the Lloyd’s of London market.
“Even if pricing does turn in the next 12 to 24 months, it will take much longer for many carriers to turn around their financial positions and solve their underlying problems,” he said.
“Large portions of the business carriers will book in 2019 has already been underwritten at today’s prices.
“The market can turn quickly but it takes much longer to repair a balance sheet. The larger carriers are like supertankers with very small rudders. They take a long time to turn around and there will inevitably be a hit to their earnings in the process.
“And everyone looks at quarterly earnings. It will not be an easy time.”