The increases seen in the attachment points of reinsurance covers is expected to benefit reinsurers after the first-quarter, with these moves expected to constrain losses from Q1 catastrophe events, KBW’s analysts have said, which has a positive read-across for ILS strategies.
While KBW says that its EPS estimates for P&C players are modestly below consensus, due to the catastrophe loss activity seen, it believes that the primary insurers could retain more of the losses, as reinsurance attachments moved up.
Despite first quarter catastrophe losses from the earthquakes in Turkey and the severe convective storms seen in the United States, KBW’s analyst team aren’t expecting a significant impact for the reinsurance carriers they follow.
“We expect most reinsurers’ underwriting results to improve y/y in light of higher rates, lower ceding commissions, and tighter terms and conditions,” the analysts explained.
Adding, “We expect most underwriters to report moderate (rather than low) but manageable catastrophe losses stemming primarily from the Turkish earthquake and U.S. weather, with the reinsurers’ exposure constrained by rising reinsurance attachment points.”
Discussing the reinsurance market’s expected reporting at the upcoming Q1 results season, KBW said that core and reported loss ratios are expected to decline year-on-year.
Although some margin volatility may be evident due to changes in business mix and the “modest” catastrophe loss load.
For the insurance-linked securities (ILS) fund strategies, the first-quarter of 2023 should also have been relatively minor, in terms of any loss burden.
With those higher reinsurance attachments and the reduction in allocating to aggregate reinsurance and retro covers set to help better insulate ILS strategies from any effects caused by Q1 catastrophe and severe weather events.
There will be positive commentary during the reporting season on the recent April reinsurance renewals, as well as on rate expectations for the mid-year, KBW’s analysts expect.
But, in addition, there is likely to be some focus on reinsurers that have doubled-down on catastrophe risks, in an effort to grow that category during the hard market environment.
There is one wild-card for Q1 results and that is the chance of development to US tornado and severe convective storm losses seen during the quarter.
As broker BMS recently cautioned, there is a chance these develop quite considerably and the quarter becomes a particularly expensive one for that peril.
Again, though, these could hit primary carriers more, as reinsurers attachments now sit that bit higher in their towers.
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