Mid-year renewals may be flat, Jan 2019 could see return of pressure: Analysts

Equity research analysts from Morgan Stanley and JMP Securities both expect that the mid-year reinsurance renewals at June and July 1st will see prices largely flat, but with some pockets of loss affected accounts up a few percentage points, which is far from the rate environment that had been hoped for.

The two sets of analysts have visited Bermuda in recent weeks to meet with insurance and reinsurance firms to inform their analysis of the market.

The general outlook for the rating environment across the rest of 2018 seems gloomy at best, with companies expecting flat to slightly up renewals in the main.

Looking further ahead, if the reinsurance market remains free of really major catastrophe losses through the hurricane season and rest of this year, then the January 2019 reinsurance renewals are expected to be flat to down as pricing pressure would be expected to return.

The weight of capacity is largely to blame for this, according to both sets of analysts, as they cite excess traditional reinsurance capital and an insurance-linked securities (ILS) market that continues to grow.

Both say that the impressive ability of the ILS market and other alternative reinsurance capital vehicles to reload and raise new funding even after 2017 saw the largest ever losses to hit the sector is keeping rate increases lower.

One of the factors that we see at play here is the willingness of ILS fund markets and other collateralized players to renew loss affected accounts at lower rate increases than traditional reinsurers have been willing too. This is beginning to drive forward expansion of ILS into the key U.S. catastrophe exposed property market in 2018.

But at the same time, the major globally diverse re/insurance players, as well as some other types of insurers for whom U.S. property catastrophe risks are diversifying (such as certain mutuals), are also deploying capacity into reinsurance and retrocession renewals at rates barely above last year.

We’ve seen some significant growth into U.S. property catastrophe reinsurance by a number of global markets in 2018, who have clearly been happy with the lower than hoped for rate increases.

There has also been an element of reinsurers choosing to deploy much more capacity in January, as they were already aware that the way the market was moving suggested that the June and July renewals would not see the rate increases some had anticipated.

By bulking up early and taking advantage of the best rates possible, which are likely the ones seen in January, these reinsurers may have secured themselves a better performing portfolio for 2018. Which will be viewed as both prescient and positive if the pressure does return in January 2019 and beyond.

Commenting on the meetings had in Bermuda, Morgan Stanley’s analysts said that they had been expecting the market to appear more buoyant at June 1st, given the number of Floridian accounts set to renew that had faced losses from hurricane Irma.

But, “Our meetings with 7 (re)insurers in Bermuda (Arch, Axis, Hiscox, Nephila, PartnerRe, RenRe, and Third Point Re) point to flat to +5% rate increases, a further disappointment from Jan 1 renewals. Loss free accounts are renewed at flat while loss impacted accounts rate changes range from flat to high single digit,” the analysts explained.

“Without meaningful increase in demand, the abundant supply still favor the buyers of reinsurance. In absence of large, unexpected losses or significant industry reserve issues, Jan 1 renewals in 2019 could be under further pressure,” Morgan Stanley’s analysts continued.

The analysts from JMP Securities also commented on their visit to Bermuda, before which they seem to have had a more positive outlook for reinsurance pricing.

But, “After our two days of meetings in Bermuda, we believe that on the margin those tempered expectations could still be too optimistic. We do not think a flat renewal is out of the question, and that, at best, average pricing will be up a few points, with a modest variance around pricing of individual renewals,” JMP’s team said.

In fact, the JMP team went on to say that the fact that property catastrophe reinsurance pricing has barely moved following the catastrophes of 2017, shows that, “property catastrophe reinsurance is firmly in commodity territory, driven by an influx of collateralized capital.”

The analysts said that at first it was “mind-boggling” that pricing could be within a stones throw of flat after such huge losses for reinsurers and ILS funds, but actually the losses were within expected and modelled ranges, meaning that, “forward expectations did not need recalibration, and post-event increases in supply outpaced increase in demand.”

Both sets of analysts say they remain cautious on recommending investment in property catastrophe focused reinsurers as a result of the current market conditions.

So, things really haven’t changed much over the last six years or more now, with the pattern of softening or at least tepid rates looking set to continue into 2019 and beyond now, unless we see some more capital draining loss events.

The impact of 2017’s catastrophe losses on the rate environment and reinsurance market cycle was greatly reduced, disappointing some, but still being considered sufficient to boost returns by others.

The result is the flatter reinsurance market cycle which had been predicted, as the elasticity and fungibility of capital in insurance ensures we don’t see the peak and trough market’s of the past again.

The ability of capital in reinsurance to be mobilised and deployed far more efficiently than before is one of the positive effects of the entry of the capital markets and the development of ILS structures.

This will help re/insurers to become more agile and responsive to market conditions, but is causing pain for those more dependent on rate levels and specific areas of the market for returns.

It was back in 2014 that we discussed that reinsurance was moving towards a market construct where the least conservative underwriters may be those dictating pricing, while the level of capacity in the sector would drive the overall cycle.

We’re still at the stage in the evolution of re/insurance where the price is being set by those able to wield diversification to discount their rates, or with so much capital to deploy they influence pricing, or those willing to upsize their share in a market to secure any upticks in rates that become available.

These price setters can be traditional or alternative.

The long-term winners will be those either able to control this deployment of capacity, across a diversified book and multiple lines, so as to still deliver a sufficient return for their stakeholders.

Those who have capital efficiency to sustain underwriting in a market that remains relatively flat over the longer-term.

Or those that become more selective, increasingly specialist, maintain a margin focus and who find more efficient ways to access risk while getting paid a commensurate amount for their depth of expertise.

With the outlook remaining gloomy the importance of efficiency will be increasingly key, while the ability to match risk and capital in a frictionless manner could be the margin differentiator everyone is looking for.

All eyes will remain on the hurricane season this year, as without loss activity the market looks destined to remain relatively flat to down over the coming renewal seasons.

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