Reinsurance hard market to last till end of 2021 (at least): Jefferies

The current hardening cycle in the reinsurance market is expected to last until the end of 2021 by analysts at Jefferies, who also say the broad-based firming is now being seen in almost all lines of business globally.

One concern of analysts and market participants is a narrower hard reinsurance market, where only specific segments such as property catastrophe risk or commercial insurance see prices rise.

But this time around the hardening of prices appears to be expanding, likely assisted by the impacts and uncertainty related to the Covid-19 coronavirus pandemic, which leads the Jefferies International Limited equity analyst team to be more positive on the potential for the hard market to persist.

The analysts cite rate increases of +5% to as high as +35% being seen across recent reinsurance renewals.

Commenting on the companies they rate and the prospects for equity investors in re/insurance, “Although there is undoubtedly a need to recover some of the post-2017 losses and underlying claims inflation on top, we remain broadly positive on the sector and would buy into these price rises.”

The price rises are in line with the analysts expectations, having seen the momentum build over January and April reinsurance renewal seasons, with the pandemic then exacerbating the pressure on the re/insurance segment even further.

With capital having been constrained by the pandemic and re/insurers still trying to recoup losses of recent years, the stage is now set for a more persistent phase of hardening than has been seen for more than a decade it seems.

Jefferies analysts explained, “Given the last three and a half years of high natural catastrophe claims (hurricanes, typhoons, wildfires and a pandemic), combined with underlying claims inflation in the US and compounded by the impact of low interest rates, its not surprising that price rises are gaining momentum.”

As a result, like some companies in the sector, Jefferies analyst team says, “We expect this hardening cycle to last at least until the end of FY2021 and potentially longer.”

The fact the hardening reinsurance price increases being seen are much more broad-based, spanning lines of business and geographies, gives the analysts more confidence that they will persist for longer.

“With almost all lines globally now showing price rises,” the analysts expect this momentum to help sustain the hardening for at least a few renewals more.

There is increasing confidence that reinsurance and retrocession prices will firm further at the January 2021 renewal season, especially as rate increases this year have far outpaced those seen in January, meaning those accounts (particularly in retro) have some way to catch up to the new pricing baseline set at the mid-year contract signings.

While this bodes well for ILS funds and other insurance-linked securities (ILS) strategies, given the potential to construct higher returning portfolios of business through this hard cycle, the firming is also attracting new capital, the one element that could dampen the fire under rates.

For the catastrophe bond market, which seems to have found a new level of return in recent weeks, this bodes well, as cat bonds could become a very attractive and comparatively well-priced alternative source of reinsurance and retrocession later this year, if traditional rates continue to harden.

That could help the cat bond market to deliver further quarters of robust issuance and higher priced bonds, all of which means cat bond fund managers may find new inflows easier to come by as well.