Competitive dynamics in cat bonds and retro to reinforce downward pressure at 1/1: Jefferies

As the reinsurance and insurance-linked securities (ILS) sector begins to head into the key January renewals period, equity analysts at investment bank Jefferies have said that competitive dynamics within both the catastrophe bond and retrocession markets are likely to reinforce downward pressure at 1/1.

The analysts also noted that alternative capital providers are expected to expand capacity, which will result in narrower catastrophe bond spreads.

Jefferies’ observations closely align with those of analysts at TD Cowen, who recently noted that pricing for property reinsurance appears to be pressured within the catastrophe bond and retrocession markets. They also emphasised that the decrease in retro pricing could serve as a modest advantage for reinsurers seeking to acquire retro protection in the near term.

Simultaneously, Jefferies also indicated that it anticipates the ongoing softening trends observed in property catastrophe pricing to persist into the 2026 renewal cycle, as abundant capital and muted catastrophe activity continue to exert pressure on rate momentum.

However, while H1 renewals historically tend to carry the most property exposure, early indications suggest that cedants will push for more favourable terms at both January 1st and the mid-year renewals.

While pricing is softening, investments in property catastrophe risk are still anticipated to deliver attractive returns, albeit at more moderate levels, with potential returns of approximately 20%.

In addition, analysts at Jefferies observed that although reinsurers have largely maintained their terms and conditions, there are signs of aggregate programs making a comeback.

The investment bank confirmed that it anticipates minimal involvement from its covered entities and very stringent pricing on these programs.

As well as this, risk-adjusted pricing is expected to continue to deteriorate and following a benign hurricane season, analysts said that this suggests the potential for 10-15% decreases.

The equity analysts also noted that loss free accounts could renew with decreases greater than 15%, but some 1/1 renewals will also include accounts with California fire losses.

Through the use of broker Guy Carpenter’s US Property Catastrophe Rate-on-line Index, Jefferies explained that risk-adjusted pricing could decrease another 20% at January 1st, but still remain above 2022 levels (by ~2%).

To conclude, analysts outlined that large and/or public reinsurers usually achieve better terms & conditions and pricing in comparison to what gets reported, which supports more favourable ROEs than what various industry commentaries would suggest.

“With unchanged retentions and stable terms & conditions, property-catastrophe reinsurance remains an attractive avenue to deploy capital as price alone does not move returns as much as one would think. Conversations with management teams suggest ROEs on property-catastrophe are north of the cost of capital and are still ~20%,” Jefferies said.

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