Jefferies Group has released a report that questions Berkshire Hathaway’s dominance of the retroactive reinsurance sector, suggesting that it represents a huge opportunity for European reinsurers to exploit.
The report observes that reinsurers have been pushing for growth in traditional markets with highly competitive renewals set for April and June, but suggests they have overlooked the retroactive sector, where there is little to no competition.
Warren Buffett’s Berkshire Hathaway has written $20.3 billion of premiums over the last eight years through six huge deals in the retroactive reinsurance sector, and has a seemingly unchallenged monopoly over the market.
Jefferies found it to be an unusual anomaly that, in an increasingly commoditised market, reinsurers would be reluctant to challenge this monopoly, and suggested that it represents fertile ground for reinsurers to exploit and increase their growth.
The report attributed this reluctance to the key role of Return on Assets (ROA) in retroactive reinsurance, which, like other long-tail business, earns most of its profits through investments rather than underwriting.
Whilst Berkshire Hathaway writes off potential underwriting losses as the ‘cost of float’, European reinsurers typically try to leverage their superior risk knowledge to achieve higher underwriting margins.
Jefferies expects that European reinsurers will avoid writing large retroactive reinsurance deals until high ROA opportunities emerge, given that high ROA is a necessary prerequisite for generating economic value.
However, if such asset opportunities should arise, competition in the retroactive reinsurance sector could rise dramatically, making retroactive deals a potential lead indicator of large-scale mergers and acquisitions (M&A).