U.S. property catastrophe reinsurance to decline 15%-25% at renewal: Nomura

As reinsurance pricing pressure builds, due to surplus traditional reinsurance capital, the influx of alternative capital and higher risk retention rates at primary insurers, Nomura analysts suggest U.S. property catastrophe reinsurance pricing could slip by 15% to 25% at renewals.

With just two weeks to go until the key January reinsurance renewals, where many of the world’s largest reinsurance programs are up for renewal, sentiment regarding the prospects for pricing expectations keep worsening. Expectations are that the reinsurance market will generally see very little in the way of substantial price rises this year, apart from perhaps a few loss affected lines and regions.

As ever the focus is on the expectation for pricing in the U.S. property catastrophe reinsurance market, the scene of the highest levels of competition seen in many years thanks to high levels of capital, both traditional and non-traditional, as well as an appetite among primary insurers to retain more risk.

A ‘perfect storm’ is closing in on property catastrophe focused reinsurers, as declining rates, increased competition from ILS and alternative sources, increased capacity available from the traditional side, higher retentions at primary insurers and further relaxed terms and conditions, all converge to apply more pressure.

Analysts at Nomura, Clifford Gallant and Matthew Rohrmann, who said in June that a soft reinsurance market was on the way an expectation that was reiterated by Bermudian reinsurance execs recently, have lowered their expectations for reinsurance pricing at the January renewals.

Discussions that the Nomura analysts have had with reinsurance brokers and underwriters recently suggest to them that reinsurance prices are falling faster than had been expected. For U.S. property catastrophe risk it is suggested that price declines on reinsurance renewals will be in the range of 15% to 25%, significant after the falls earlier this year. For Europe and the UK the analysts expect more stable pricing, of flat to down 5%. Global casualty reinsurance renewal pricing is expected to be largely flat.

At the same time as pricing slips further or remains largely flat primary insurers are increasing their retentions, said the Nomura analysts. The expectation is that primary insurers will in the main increase their retentions by as much as 5% to 6%.

The Nomura analysts say that they expect an orderly renewal but that bid/ask spreads are visibly tightening as we get closer to the renewal date. The growing impact of alternative reinsurance capital, the relatively quiet loss year in 2013 and a growing reinsurance sector capital surplus pressure prices, while flood losses in Central Europe and concerns about casualty profitability have offset this a little.

All of this means a smaller pool of available reinsurance business, greater competition and lower pricing. In this climate the more efficient and lower cost of capital of insurance-linked securities (ILS) and collateralized reinsurance backed by capital market investors can thrive. However for traditional reinsurers, after what is expected to be such as challenging renewal season, 2014 promises to be a tricky time.

The analysts expect increased top-line pressure on reinsurance firms, with the catastrophe focused likely the hardest hit. However, should 2014 prove to be another year of light losses, reinsurers may not feel quite so much pain and reinsurer return on equity may not suffer so much.

However, the analysts note, should we see a major loss year in 2014 the reinsurers having the last laugh may be the ones that declined to write underpriced business.

If catastrophe reinsurance prices continue to decline as we move through 2014, with some Asia and Japanese renewals in April currently looking likely to see price declines while the region remains free of large losses, the pressure on reinsurers could increase. Once into the second-half of 2014 reinsurers expense ratios could begin to look costly, highlighting the lower capital costs associated with more efficient ILS and collateralized capacity. This is when questions may begin to be asked and reinsurer management may find Q3 2014 earnings calls see analysts raising some tough questions.

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