McElhiney Muses the Biz

The AIRROC West Coast Conference was pleased to have Mr. Steve McElhiney as the Keynote Speaker. Mr. McElhiney is the Chairman and President of EWI Re of Dallas and EWI Re (UK), Ltd (London) and is President of Vermont’s Tall Pines Insurance Company. His experience in the insurance industry has spanned over two decades. His background in corporate finance and reinsurance provides a unique insight into the recent convergence of the capital and reinsurance markets. Prior to joining EWI Risk Services, he served as: Corporate Treasurer of Argonaut Group, CFO of Overseas Partners US Re, Senior Vice President, Reinsurance of TIG Insurance and Associate Director of Reinsurance of Fireman’s Fund. Mr. McElhiney received MBA and BS degrees from the University of Southern California. He holds the CPCU, Associate in Reinsurance, and AIAF certificates and is a Past President of the CPCU Society.

Mr. McElhiney spoke about current macro reinsurance trends, gave an overview on CAT losses and finished his presentation by providing an overview on capital markets and reinsurance. Mr. McElhiney’s discussion of macro reinsurance trends covered various topics including global growth, industry profitability, emerging CAT zones (both in the U.S. and globally), interest rate pressures and profitability and regional carrier and broker challenges. He explained how the low growth experienced by the U.S. economy and the government’s monetary policies over the past several years has led to decreased profits within the domestic insurance industry. Mr. McElhiney detailed the property and casualty insurer’s corporate return on equity results as compared to all industries within the United States between 1987 and Year End 2010. There has been an overall underperformance of the insurance industry as compared to all domestic industries during this time frame with steeper decreases when CAT losses occurred.

A discussion of increased CAT exposures was supported by some interesting demographic changes within the United States over the past decade. The population within the U.S. has increased 9.7 percent between 2000 and 2010, shifting towards coastal areas. Half of the population and insured risks are concentrated within 50 miles of the U.S. coast. There have also been huge increases in domestic residential and commercial development along the coasts with a combined 6.6 trillion dollars of insured risks found in coastal property located in Texas, Florida and New York. Thunderstorms and tornado events cost $14.9 billion in insured losses and $27.7 billion in economic losses in 2012.

Mr. McElhiney’s discussion of the capital markets covered alternative reinsurance mechanisms, insurance company acquisitions, intermediary consolidations, CAT bonds and contingent capital vehicles. Mr. McElhiney mentioned that Bermuda and the Cayman Islands are attracting more special purpose insurers which are often backed by hedge funds as private equity is not a good fit with the P&C insurance model because it seeks a 7-10 year investment horizon that is usually not correlated with market cycles, and CAT bonds are growing in acceptance as alternative investment vehicles.