Dave Obenauer was speaking to this publication on the sidelines of the Wholesale & Specialty Insurance Association’s annual convention in San Diego last week, saying loss activity – among other factors – had helped maintain the surging growth profile of the excess and surplus lines market.
“The pace of demand keeps going up, so there’s more inflow still into the marketplace,” the executive noted. Obenauer added that rate increases and exposure growth from a rebounding economy were also serving as tailwinds for his business.
“We see that as continuing into 2022 pretty consistently,” he continued, going on to explain a structural shift towards more business in the wholesale channel was continuing to play out.
“If you look at the long-term trends, E&S has continued to grow as a percentage of the overall commercial insurance business for many years now. That'll be the case for this year and I think next year too.”
Obenauer acknowledged the challenges facing the property cat market, with the segment consistently absorbing heavy losses in recent years. He expects that loss experience to “drive more rate”, though he also said new capacity coming into the market would help offset lost capacity from other carriers looking to scale back.
Hurricane Ida and Winter Storm Uri have taken a heavy toll on the property market this year, leading to further tightening in pricing and capacity. There has been some speculation that losses from Uri may ultimately come in higher than originally predicted, while claims for Ida could end up being lighter.
According to Obenauer, that debate misses the key point.
“The common theme in both cases is that they were unmodeled losses, which is why they were such a shock to the capacity in the system.” The executive explained that the biggest factor the market is now grappling with is how to price the unmodeled components from cat events.
“So whether Uri is up or down 10% or Ida is up or down 10%, I don't think is really the issue,” he commented. “It's the big picture unmodeled piece.”
Despite industry pricing reports in the first and second quarters showing a slowdown in property price increases, Obenauer said his company had not observed any rate softening in property over the course of the year.
“Those two [events] certainly reinforced momentum the market had,” he observed.
New capacity entrants ‘fairly disciplined’
Although Obenauer said new capacity that came into the market had helped “solve client challenges more easily”, he described the cohort of start-ups and scale-ups as “fairly disciplined”.
“They've all come into the market wanting to benefit from the market, as opposed to undermining the profitability of the market,” he commented.
As such, although the new capacity has helped deals to get done on the margins, it has not fundamentally shifted the market.
“It's not insignificant, but as part of the overall market, it's not a gamechanger,” he said. “It's not big enough to make a market move down.”
He also noted that actions taken by heavyweight incumbents – citing AIG’s Lexington and Lloyd’s in particular – have continued to have the greatest impact on market conditions.
“That's what drives the market,” he said.
No pressure to scale in the MGA market
Obenauer also spoke about M&A opportunities in the sector, with many wholesale intermediary businesses eyeing opportunities in the MGA space, given that many consider consolidation in the transactional brokerage segment to largely be complete.
In July, CRC completed its takeover of the $160mn-revenue MGA Constellation, and Obenauer said that while his company would look to do more deals, making a move would be “opportunity dependent”, with no need for the wholesaler to participate in an M&A arms race.
“For us, it's an opportunity to bring on more clients,” he noted regarding the Constellation deal. “It brought additional products and industry groups that we didn't have as deeply as we'd like.”
The interesting dynamic that we're starting to see is that the market is starting to differentiate between higher quality businesses, and those that are not as high quality, which is healthy
Obenauer also pointed out that part of the appeal of that transaction was the ability to further penetrate the fronted programs market, where Constellation has had more significant success, and where underwriting capacity is provided on a syndicated basis.
“That's a whole new model that we're seeing across the industry that allows us to be better distributors for capital than if we just do the traditional, one-carrier-at-a-time per program,” Obenauer explained.
The chief executive was skeptical that demand among buyers for MGA assets was any greater than it was two years ago, but said CRC had observed potential buyers exercising more scrutiny.
“The interesting dynamic that we're starting to see is that the market is starting to differentiate between higher-quality businesses, and those that are not as high quality, which is healthy.”
He went on to say that his firm retained the capital flexibility to get deals over the line, but didn’t feel pressure to scale its MGA business for the sake of scaling.
“We're not going to do it unless they make sense,” Obenauer commented. “We've got a capital owner-provider that pretty much wants us to grow both organically and through acquisition.”
“So we're able to do large and small deals and everything in between, without any issues around capital raising on our side,” he said. “It's really about finding the right opportunities that fit our business and the cultures fit, and the people fit.”