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Investors expect “substantial renewal pricing upside” – Jefferies


According to the global insurance and reinsurance equities analyst team at Jefferies, the share price reaction to hurricane Ian has been more benign than expected, leading them to suspect investors are looking to the “substantial renewal pricing upside” that is now anticipated.

jefferies-logoIn a report on the sector, Jefferies analyst team highlight the “surging” industry loss estimates associated with hurricane Ian, that began at $20 billion to $30 billion, but now stand at $45 billion to $65 billion, and even higher.

Despite the expectations of a major industry loss for the insurance and reinsurance market, “We have been surprised by the relatively benign share price reaction, with investors evidently looking to the substantial renewal pricing upside rather than the quarterly earnings headwind,” the analysts explained.

They note that with hurricane Ian, the “industry loss estimate has spiralled materially,” but added that significant uncertainty persists.

Commenting on the potential impact to re/insurers the analysts explained, “Given the magnitude of this catastrophe and the continued spiralling of industry-wide claims estimates, it would be reasonable to attach a question mark to P&C reinsurance and group level financial targets in the industry.

“Nevertheless, we do consider this to be “an earnings rather than a capital event” in aggregate, albeit some already stressed reinsurers (e.g. with high exposure to earlier catastrophes this year), may find themselves in a loss making position this year.

“In a minority of cases, credit ratings may even be in question, making strong performance next year critical (in turn contributing to pricing upside).”

Industry expectations for a pricing upside at 2023 renewals were already in place even before hurricane Ian, but now the analysts say that “further price rises are already coming on top of substantial underlying margin expansion.”

The industry already had a tone of “bullishness” about it at the Monte Carlo Reinsurance Rendez-vous event, with expectations for additional capacity constraints, market dislocation and upside expected at the January 2023 renewals, the analysts said.

But still, the “resilience” of re/insurer share prices in the wake of hurricane Ian has been “surprising” the analysts from Jefferies explained.

However, perhaps this indicates the markets (and investors) are prepared to take a longer view on insurance and reinsurance, they suggest.

“In previous years, we’ve been of the view that the net present value of future price rises is worth more than the cost of claims today,” Jefferies analyst team said.

Adding, that “However, having reiterated this argument for more than five consecutive years, we were concerned that the market’s patience would be wearing thin waiting for this thesis to pay off.

“As such, the resilience of share prices is both surprising and highly reassuring, as it suggests that the market is still prepared to take a longer term view.”

This sentiment, that investors are not running scared from insurance and reinsurance, despite the impacts of hurricane Ian, may provide some encouragement to those in insurance-linked securities (ILS).

While there are certainly investors that will view hurricane Ian as a potential final straw for their ILS allocations, there are others with longer-term views and that see an entry opportunity as well.

Some longer-term investors in the ILS space hold similar views to those on the equity side, that the upside now expected to become available may be worth staying deployed for, or even deploying more capital to.

That view isn’t held by everyone and there are detractors to the thesis, of course.

There is still a widely view in some quarters that catastrophe reinsurance pricing has been suppressed, by overly competitive underwriting, poorly calibrated models, a lack of data and in some cases indiscipline through a period with little major loss activity, and that this has resulted in losses flowing to investors.

But, some end-investors we’ve spoken with since hurricane Ian, have told us that Ian fell within the range of expected, or anticipated (possible) loss events, and as long as their ILS investment losses do too, then they will be prepared to remain allocated to the space, with some indicating they could even upsize commitments for the right opportunity.

As Luca Albertini of Leadenhall Capital Partners explained in our recent interview, “In some cases the benefits of re-underwriting will be apparent,” after hurricane Ian.

This is what investors in ILS will now be looking for.

Evidence that the losses suffered by specific ILS fund strategies fall within the range of expected losses related to an event the size of hurricane Ian, and that there is also evidence that the re-underwriting, as well as improvement of terms and conditions, undertaken in recent years is having some positive effects when it comes to downside performance, compared to other recent years.

A substantial renewal upside is definitely ahead, barring any massive disruption to the rate trajectory caused by new capital.

There is a range of discussion ongoing, among brokers and differentiated capital sources, that could see more capacity made available. However it’s unlikely to be sufficient to replenish what is lost or trapped after Ian, as well as reinsurers balance-sheet challenges due to macro effects.

But the over-arching sentiment we’re hearing, is that markets (new and old) are set to align on price increases towards the renewals, with a broad recognition that significantly more rate is needed in peak US catastrophe reinsurance lines.

This still won’t be enough to keep every investor on-side in ILS, of course, which signals the potential for a continuation of the churn of investor allegiance and capital deployment over the coming months within ILS.

Read all of our coverage of hurricane Ian, and our analysis on the potential market losses, here.

Register today for ILS NYC 2023, our next insurance-linked securities (ILS) market conference. Held in New York City, February 10th, 2023.

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