Many carriers to be cashflow negative by 2019: Catlin

The re/insurance industry is in a much worse position than its bosses will admit and many carriers will be cashflow negative by the end of 2019, industry veteran Stephen Catlin has warned, in an explosive interview in which he stressed that any executive running a public company could not risk highlighting this reality to investors.

Catlin, who founded the Catlin Group, stepped down as executive deputy chairman of the XL Group last year. He is a senior adviser with private equity firm Aquiline Capital Partners and the chairman of the Insurance Development Forum, but in these roles he retains the freedom to voice his thoughts.

Catlin told Monte Carlo Today that moving into a cashflow negative position will be the event that finally moves the market: carriers will have no choice but to respond with rate increases and more sensible business models, he believes.

“I am no longer at the coalface but that means I can speak my mind. 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 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.”

Catlin believes pricing in the market should have turned two years ago. “As frustrating as it is, it seems however that the market really has to bleed before anything significant changes.

“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.

Wakeup call

The biggest wakeup call for the market will be when brokers start to fail to get placements finished, Catlin added.

“When the leader cannot get the support of the market and the broker cannot get a placement home, you know things must change. We are inching towards that scenario now. When you have seen so many cycles, you get an instinct for what will happen.

“Those who say this is the new norm and these prices are here to stay are naïve. 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.”

He stated that while Lloyd’s is not necessarily the biggest influence on the wider market, it does offer a good sense of the health of the industry. He claimed that a close examination of the market’s overall results in 2017 shows that almost every product line made a loss with one exception: energy. “And that was down to luck,” Catlin said.

Lloyd’s is conducting a profitability review and some syndicates may be forced to change. “But why should they need to be told that by someone else?” he asked.

“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. 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,” he said. “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.”

Catlin stressed that most executives agree with him but they cannot say it publicly. “I understand that—if I had a balance sheet now I would be the same. 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.”