The insurance market continues to feel the pain of the industry down-turn. The supply and demand imbalance for the past 18-24 months has continued unabated. The market is still characterized by drastic over-capacity and demand that has fallen off a cliff. CAPEX is down in excess of 75 percent for many energy firms; drilling has virtually stopped as has most midstream construction (both of which were very lucrative activities for insurers the past 24-36 months).
Yet recently, we’ve seen a potential bottoming in certain classes of business. We placed a few upstream risks in March where London market participants have actually declined to write what would be new business to them, citing a premium rating that was “too aggressive.”
Certainly two months of declinations does not make a market shift, but it is a trend though that is seeing deals not get completed at the leader’s terms. Rates remain fantastically competitive versus historical norms and it is a great time for assureds to be transferring risk. The question, much like their counter-parts in the energy industry, is whether or not we’ve bottomed.
Calling a bottom is the way to make a fortune. It is also exceptionally difficult. None other than legendary financier Carl Icahn has lost nearly $1.5B (on paper) during the past 12 months investing heavily in companies like Chesapeake Energy, Freeport-McMoRan and Cheniere Energy. Icahn started buying shares in 2015 and admitted in February of this year that the scale of the oil slide had taken him by surprise. Perhaps this is Icahn’s “Big Short” moment, where he might have been early, but he wasn’t wrong.
Oil doesn’t have another $70 to fall. Reductions in drilling will inevitably translate into lower supply. Increasing populations and globalization lifting living standards will inevitably translate into increased demand. Opportunistic investors have watched with interest as energy companies have navigated the stages of grief during the past 20 months. Shock and denial gave way to anger and depression. We are close to capitulation now which has to come before acceptance and hope.
The beauty of capitalism is often seen in creative destruction; industries mutating as old economic structures are destroyed and new, better, structures are created. The Houston boardrooms that are facing headwinds now will eventually feel the wind at their backs.
Unfortunately for the current occupants of those boardrooms, the future will see many new people at the table. Investors long to see that evolution and those with the boldness to see it through will reap the profits. So will the insurers who are willing to play the game through the cycles and partner with the energy industry when the market is a proverbial duster as well as when it’s a gusher.
This is the third of a special three-part series on the Energy market. View the first post, “2 Events in Q2 that Could Create an Optimistic Energy Market,” and second post, “Energy Market Seeing Choppy Waters in the Gulf of Mexico.”